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R E S H A P I N G A U S T R A L I A N L O C A L G O V E R N M E N T

RESHAPING AUSTRALIAN

LOCAL GOVERNMENT

FINANCE,GOVERNANCE AND REFORM

E d i t e d b y

Brian Dol ler y, Nei l Marsha l l and Andrew Worthington

UNSWPRESS

A UNSW Press book

Published byUniversity of New South Wales Press LtdUniversity of New South WalesSydney NSW 2052AUSTRALIAwww.unswpress.com.au

© UNSW Press 2003First published 2003

This book is copyright. Apart from any fair dealing for the purpose of private study, research, criticism or review, as permitted under theCopyright Act, no part may be reproduced by any process withoutwritten permission. While copyright of the work as a whole is vested in UNSW Press, copyright of individual chapters is retained by thechapter authors. Inquiries should be addressed to the publisher.

National Library of AustraliaCataloguing-in-Publication entry:

Reshaping Australian local government : finance, governanceand reform.

Bibliography.Includes index.ISBN 0 86840 653 8.

1. Local government - Australia. I. Dollery, Brian.II. Marshall, Neil, 1950- . III. Worthington, Andrew.

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List of contributors ixForeword xiii

1 INTRODUCTION Brian Dollery, Neil Marshall and Andrew Worthington 1

Outline of the book 4

PA RT A I N T E R N AT I O N A L C O N T E X T 1 1

2 LOCAL GOVERNMENT: REFORM IN COMPARATIVE 13

PERSPECTIVE Janice Caulfield

United Kingdom 20Australia 21New Zealand 21Germany 22The Netherlands 23Switzerland 23Sweden 24North America 24Japan 25Other OECD countries 26The data 28Analysis 28Conclusion 32

PA RT B F I N A N C E 3 5

3 FINANCING LOCAL GOVERNMENT IN AUSTRALIA 3 7

Andrew Johnson

The nature of the problem 38

C O N T E N T S

The genesis of the problem 41Commonwealth financial assistance grants 53Managing the problem 59Conclusion 62

4 L O C A L G O V E R N M E N T F I N A N C I A L R E P O R T I N G 6 4

Christine Ryan

External reporting 64Conclusion 77

5 A M A L G A M AT I O N A N D V I R T U A L L O C A L 7 9

G O V E R N M E N T Paul MayCharacteristics of Australian government 80Tensions between efficiency and democratic representation 85Pursuing the economic panacea: optimum size 87Virtual governments 89Chasing the pot of gold 91Conclusion 96

PA RT C G OV E R N A N C E A N D M A N AG E M E N T 9 9

6 R E A S S E R T I N G L O C A L D E M O C R A C Y ? 1 0 1

Rosemary Kiss

What is community? 105Community and local government legitimacy 107Local government, democratic representation 111and the franchiseConclusion 115

7 M A N A G E M E N T R E F O R M I N L O C A L 1 1 7

G O V E R N M E N T Geoff Baker

Top-down management reform — the role of the States 118and the CommonwealthLocal government and the new public management 124Conclusion 137

8 T H E R O L E S A N D R E S P O N S I B I L I T I E S 1 3 9

O F C H I E F E X E C U T I V E O F F I C E R S A N D

C O U N C I L L O R S I N A U S T R A L I A N L O C A L

G O V E R N M E N T : A C O R P O R AT E G O V E R N A N C E

P E R S P E C T I V E Neil Marshall

The context of corporate governance 140The public sector 141

V I • R E S H A P I N G A U S T R A L I A N L O C A L G O V E R N M E N T

Corporate structure in local government 142The role of councillors 144The role of chief executive officers 147Some corporate governance perspectives 152Conclusion 155

PA RT D P O L I C Y R E F O R M 1 5 7

9 P O L I C Y N E T W O R K S A N D L O C A L G O V E R N M E N T 1 5 9

Joe Wallis

Local government involvement in multi-organisational 160partnerships (MOPs)

Overcoming co-ordination problems through alternative 161governance mechanisms

The capacity of councils to supply local governance 171Conclusion 175

1 0 L O C A L G O V E R N M E N T E F F I C I E N C Y 1 7 6

M E A S U R E M E N T Andrew Worthington

The theory of efficiency measurement 179Efficiency measurement techniques 181Problems in measuring local government efficiency 186Studies measuring efficiency in local public services 188Determinants of local public sector efficiency 195Conclusion 198

1 1 . L O C A L G O V E R N M E N T F A I L U R E Brian Dollery 2 1 2

Taxonomies of local government failure 213A new taxonomy of local government failure 215Conclusion 228

PA RT E F U T U R E D I R E C T I O N S 2 2 9

1 2 F U T U R E D I R E C T I O N S F O R A U S T R A L I A N 2 3 1

L O C A L G O V E R N M E N T Brian Dollery and Neil Marshall

The achievements of Australian local government 232Future directions 238

References 251Index 268

C O N T E N T S • V I I

Geoff Baker has worked on reform of the legislative framework forlocal government in Queensland since 1989. His roles have includedbeing instructing officer for the development of Queensland’s newLocal Government Act in 1993. He was appointed to the QueenslandGovernment’s Senior Executive Service in 1994. He has also had part-time academic roles at a number of universities in Queensland since theearly 1990s. He is currently undertaking further postgraduate studies atthe Australian Graduate School of Management.

Janice Caulfield is Research Assistant Professor in the Department ofPolitics and Public Administration, University of Hong Kong, whereshe teaches public sector management and public policy analysis. Hercurrent research interests include performance and accountability in thepublic sector, public sector reform and development administration.She is co-editor with Helge O. Larsen of Local Government at theMillennium, which was published in 2002 by Leske and Budrich.

Brian Dollery is Professor in the School of Economics at the Universityof New England, Armidale, and Visiting Professor in the InternationalGraduate School of the Social Sciences, Yokohama National University,Yokohama, Japan. He has previously held academic positions at theUniversity of South Africa, Rhodes University, East Carolina StateUniversity, the University of Cape Town and Creighton University. Brianhas published extensively on the economics of Australian local govern-ment and is a founding member of the University of New England’sCentre for Local Government. Together with Neil Marshall, Brian co-edited Australian Local Government: Reform and Renewal in 1997.

C O N T R I B U T O R S

Andrew Johnson is the Director of Finance and Administration ofGuyra Shire Council in New South Wales. Andrew holds an MBAdegree from the University of New England (specialising in local gov-ernment) and is a chartered public accountant. He is presently workingon a doctorate at the University of New England dealing with the finan-cial problems confronting contemporary local government in Australia.

Rosemary Kiss is Senior Fellow in the Department of Political Scienceat the University of Melbourne. She served as an elected councillor forsome years in Melbourne and is a past member of the Victoria GrantsCommission. She has published widely in the area of local government.Along with Peter Johnstone, she co-edited the 1996 volume, GoverningLocal Communities — The future begins.

Neil Marshall is Associate Professor in the School of Social Science atthe University of New England and teaches in the areas of Australianpolitics, public policy and public sector management. He has publisheda number of articles and edited volumes in these areas, including the1997 book Australian Local Government: Reform and Renewal, whichhe co-edited with Brian Dollery. Neil is a founding member of theCentre for Local Government at the University of New England.

Paul May has 29 years experience in local government. He spent 23years working in planning departments at Manly, Shellharbour andEurobodalla Councils in New South Wales. For thirteen of those yearsPaul occupied senior management positions. In 1997 he establishedPlanning Initiatives, his own consultancy practice specialising in localgovernment policy, research and urban and rural planning. Paul assist-ed Professor Kevin Sproats on the Inquiry into the structure of localgovernment in eight council areas in the inner city and eastern suburbsof Sydney. He is presently completing a PhD with the University ofTechnology, Sydney, that involves examining approaches to regionalgovernance.

Christine Ryan is Senior Lecturer in the School of Accounting at theQueensland University of Technology, Brisbane. She has published anumber of papers on accounting standards and the Australian publicsector.

Joe Wallis is Senior Lecturer in the Department of Economics at theUniversity of Otago, Dunedin, New Zealand. Joe holds a PhD in eco-nomics from Rhodes University and has previously held academic posi-tions at Rhodes University and the University of Cape Town. He has

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co-authored Market Failure, Government Failure, Leadership and PublicPolicy and The Political Economy of Local Government (both with BrianDollery). Joe has also written extensively on organisational leadershipand the public sector during periods of comprehensive public sectorreform.

Andrew Worthington is an Associate Professor in the School ofEconomics and Finance at the Queensland University of Technology,Brisbane. Andrew has a PhD in financial economics from the Universityof Queensland and has previously worked in both economics andfinance at the University of New England. He has published widely inthe area of public sector economics, and especially on the measurementof efficiency in the public sector. Andrew has also produced consider-able research output on the efficiency and productivity of the Australianfinancial sector. The past year has been personally difficult for him andhe especially thanks his family and friends for their loving support dur-ing this time. He dedicates his contribution to the fond memories of hiswife Leanne Michelle Cummings.

C O N T R I B U T O R S • X I

As we enter the new millennium with new global configurations theneed for strong structures of governance at the sub-state and local lev-els is increasingly important. Despite the reform initiatives of the latteryears of the twentieth century, in this country local government struc-tures remain largely as they were at the beginning of the century. Theremay be fewer of them, and they may be providing a different range ofservices more efficiently, but by and large they still reflect theirantecedents. Local governments are not universally valued highly by cit-izens. Too often they are seen as havens for self-seeking politicians andover-regulating bureaucrats.

A recent publication by the United Nations Centre for HumanSettlement (2001) raised challenges for governance in our cities, including:

• to ensure the benefits of globalisation are shared more equally;

• to redress the unbalanced emphasis on economic growth and accumulation

of wealth by placing renewed emphasis on social justice and environmental

sustainability;

• to develop enabling strategies that include support for the exercise of

citizenship;

• to provide local government with more political legitimacy,

responsibilities and resources;

• to develop co-operative partnerships between government, private sector

and civil society;

• recognition that the complementarity of civil society and government is at

the core of good governance.

F O R E W O R D

In October 2000 I was commissioned by the New South WalesGovernment to conduct an Inquiry into the structure of local governmentin eight council areas in the Inner City and eastern suburbs of metropoli-tan Sydney (Sproats 2001). At the end of that Inquiry in May 2001 I cameto the firm judgement that local government structures in the area shouldbe recast to provide fewer, better resourced, more strategically focussedcouncils. The very few voluntary attempts at structural reform in NSW upto that time had involved simplistic amalgamations of two or more adjoin-ing councils. But the Inquiry found that restructuring needed to be sub-stantially broader than simply achieving scale. It also highlighted theimperative of more strategically focused attention to the characteristics andaspirations of suburbs at one level and regions at another level.

In general I found that while the present structures of councils hadprovided services and facilities to their communities with varying levelsof satisfaction, there were significant inadequacies in their fundamentaloperations. These related especially to:

• deficient strategic planning;

• inadequate formulation and communication of policy and sustained com-mitment to it;

• minimal regional perspective and focus;

• poor inter-governmental cooperation;

• unresolved aspects of the roles and functions of mayors and councillors;

• inability to manage cross boundary issues, particularly on several keyregion-level sites;

• inequitable distribution of, and access to, resources.

A voluntary approach had proven to be not sophisticated enough toachieve this scale and scope of reform. I argued that recasting was needed,recasting of what local government was, what it did, and how it did it.

No significant change has yet emerged from either local or state gov-ernments as an outcome of the Inquiry. Equally, I have lamented at thelimited debate on the big questions of transformation of local governmentand recasting of council structures. I am delighted that the editors of thisvolume have drawn together academics and practitioners to address someof the issues raised in the international forums and those to emerge frommy local Inquiry. Strong, highly valued local government in Australia isessential. The contributions here provide substance to the debate.

Professor Kevin SproatsUniversity of Western Sydney

X I V • R E S H A P I N G A U S T R A L I A N L O C A L G O V E R N M E N T

Scholars have invested a vast amount of effort into the theoretical andempirical analysis of government in representative democracies. Despitethis impressive literature, local government can nevertheless justly bedescribed as the poor cousin of its more exalted state and federal relativesin terms of the attention it has drawn from the research community. Atleast three factors may explain the existence and persistence of this unfor-tunate state of affairs. In the first place, in many advanced economiesexpenditure by local government often comprises a relatively small pro-portion of total public sector outlays and thus it may have been con-strued as somewhat less deserving of scholarly inquiry than relativelylarger provincial and central governments. This certainly appears to havebeen the case in Australia where around 730 municipalities outlay $13billion, representing some five per cent of total government expenditureor about 1.6 per cent of gross domestic product (NOLG 2001).

Secondly, even when local government expenditure in absoluteterms is high — and $13 billion can hardly be deemed negligible in theAustralian context — the constitutional fact that local governments aretypically statutory creatures of higher tiers of government generallyimplies that they are manipulated and constrained by state and federalgovernments. Most scholars of government have thus focused on thesehigher levels of governance in their attempts to account for the behav-iour of local governments. The constitutionally subordinate nature oflocal government in Australia is vividly illustrated by the fact althoughboth the Commonwealth and state and territory governments areenshrined in the Australian Constitution, local government has no con-stitutional standing at all. Thus all local authorities in Australia derive

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I N T R O D U C T I O N

Brian Dollery, Neil Marshall and Andrew Worthington

their powers and functions exclusively from state and territory legisla-tures through state acts and regulations.

Finally, and perhaps in large part due to its residual status, in manycountries local government has a historically inchoative and metamor-phic character in more or less constant flux. For instance, in his analysisof British local government, Stewart Bailey (1999, p.4) has noted that‘the ill-defined status of local government combines with changing per-ceptions of local autonomy, accountability, equity and the need formacroeconomic control, causing the relationship between central gov-ernment and local government to be in a continuous state of change’.The federal nature of the Australian polity adds further complexity tothis characteristic of local government since each of the eight states andterritories can bestow different roles and functions on their systems oflocal governance at mere legislative whim. Thus the capricious andquixotic character of municipal governance seems to have discouragedscholars from investing time and energy in its investigation.

Despite the comparative paucity of research directed at local gov-ernment in Australia and elsewhere, municipal managers and electedrepresentatives are nevertheless obliged to formulate and implementpolicy in an increasingly complex environment. It need hardly bestressed that this onerous task is made even more difficult without theguidance that could be derived from disinterested scholarly inquiry.There is thus an urgent need for accessible published research to informpolicymaking. The present volume seeks to meet this need by present-ing the views of a range of scholars on questions of concern in contem-porary Australian local government.

The complexities of Australian local governance and its multi-facetednature mean that no single academic discipline is capable of providing anadequate conceptual basis for a thorough coverage of all its dimensions.For instance, the statutory service obligations imposed on local authori-ties in Australia, with their continued, if diminishing, emphasis on ‘ser-vices to property’, necessarily imply a strong engineering focus to tacklethorny questions surrounding the development and maintenance ofphysical infrastructure, like roads, sewerage systems and water reticula-tion. Urban planning and related disciplines also offer insights into thesequestions. A second area of concern involves the prudent and imagina-tive management of financial, human, physical and other assets held bycouncils. Law, and various business specialties, such as accounting, audit-ing, economics, finance and management, can shed light on perceivedproblems in this area. Similarly, local governments have been increasingly

2 • R E S H A P I N G A U S T R A L I A N L O C A L G O V E R N M E N T

drawn into the provision of ‘services to people’ and have thus fallen intothe realm of policy analysis, social work and sociology. Economic devel-opment and the allied problems of urban growth, environmental andheritage management require additional sources of expertise. The demo-cratic dimension of local government, as well as its relationship to othertiers of governance under the federal constitution of Australia, raiseissues intrinsically bound up with political representation and fiscal fed-eralism, and thus call for the specialised knowledge of political scientists.Finally, the turbulent nature of the local government policy milieu andthe increasing demands placed on it by both citizens and higher levels ofgovernment require an advanced awareness of the nuances of policy for-mulation deriving from economics, policy analysis, public administrationand several other social sciences.

These considerations bespeak the necessity of a multidisciplinaryapproach to contemporary Australian local government. Accordingly, inthis book we have sought to draw upon the expertise of contributorsfrom a wide range of academic disciplines. Since our focus falls on thesocio-economic rather than engineering aspects of current local gov-ernment, the authors in this volume write from a social science andbusiness discipline perspective. It is hoped that the result is a policy-ori-entated view of Australian local government in the twenty-first centurythat combines state-of-the-art conceptual developments in the variousdisciplines with contemporary policy dilemmas. Our aim has been toprovide decision makers in local government with a sound analyticalbasis for policy formulation and implementation.

The complexities of local government and its relative neglect byscholars imply that various caveats should be appended to any analysisof Australian local government. While the terms ‘local government’,‘municipality’, ‘council’, and ‘local authority’ are used synonymouslythroughout this book to describe democratically elected sub-centralgovernments with legal jurisdiction over spatially limited areas, theynonetheless all describe a tier of government characterised above all elseby diversity. After all, while some municipalities serve large populationsin big cities with budgets measured in billions of dollars, their muchmore modest cousins may attend jurisdictions with a mere handful ofpeople. Similarly, whereas some local authorities embrace areas com-prised largely of commercial and industrial activity, others preside overwidespread rural constituencies. Moreover, under current intergovern-mental financing arrangements, councils with different demographicand geographic characteristics face different funding regimes.

I N T R O D U C T I O N • 3

Compounding these complications, a given municipality with identicalspatial and socio-economic characteristics will confront different finan-cial circumstances in different Australian states. The high degree ofdiversity in Australian local government is thus cause for caution inextrapolating policies in a ‘one-size-fits-all’ manner.

A second caveat attaches to the policy role assigned to local gov-ernment. It is possible to identify two diametrically opposed approach-es to the question of appropriate policy making at the local governmentlevel. In the first place, elected representatives and municipal managerscan adopt a ‘minimalist’ position and seek to reduce the gap betweenrising expectations on the part of the public and higher tiers of govern-ment and their limited ability to meet these expectations by sticking totheir historical ‘core’ functions of ‘services to property’. Alternatively,councils can pursue a more ‘activist’ posture and attempt to play a cat-alytic role in the economic and social development of their communi-ties by expanding ‘services to people’. While the constitutional status ofAustralian local government undoubtedly places heavy constraints onthe capacity of councils to determine independently their policy stance,scope nevertheless exists for at least some choice. It should be stressedthat the selection of a policy role along the ‘minimalist’/’activist’ con-tinuum derives at least as much from ideological imperatives as ‘prag-matic’ considerations and thus depends partly on ethical factorsimmune to rational analysis.

O U T L I N E O F T H E B O O K

With these considerations in mind, the text is divided into five main sec-tions. Part A sets the scene by providing an overview of the salient char-acteristics of Australian local government and locating Australian localgovernment in the wider context of international local governance. PartB focuses on the financial environment in which local government oper-ates. It explores some of the critical issues and problems and suggestspossible solutions. Part C deals with governance and management: itexamines the changing conceptions of governance and managementover the past decade and investigates their implications for councils. PartD provides an analysis of policy reform in Australian local government.In particular, the question of policy formulation and policy networks isconsidered, the issue of efficiency measurement and improvement dis-cussed and the problem of local government ‘failure’ investigated. PartE concludes the volume by distilling its major themes and consideringfuture directions. A full index and bibliography are included.


In Chapter 2 Janice Caulfield considers the extent of recent man-agerial reforms in Australian local government from an internationalperspective. She attributes the global growth of the New PublicManagement (NPM) since 1980 to the requirement for local authori-ties to cope with a declining resource base and the need to respond torising public expectations for improved services. The particular focus ofthe chapter is upon explaining the cross-national variations evident inthe implementation of the NPM; why some countries have becomeleaders while others have lagged behind. She suggests that fiscal auton-omy — the degree of discretion which local authorities have over theirsources of finance — may be a critical variable in explaining outcomes.To test this hypothesis, Caulfield discusses the scope and substance ofthe NPM reforms across eleven nations and assesses their level ofadvancement in terms of eight established benchmarks. Each country’slevel of NPM development is then combined with indicators of fiscalautonomy. The chapter concludes that systems with low levels of fiscalautonomy are likely to be at the forefront of the NPM reform. Yet thereverse proves not to be true; nations with high levels of fiscal autono-my were also found to be NPM leaders. In these cases, however, the ini-tiators of reform were central governments rather than the localauthorities themselves.

In Chapter 3, Andrew Johnson examines the economic dilemma con-fronting contemporary local government in Australia. He argues thatmunicipalities face not only rising expectations from their key constituen-cies for more and better local services, but also heightened demands fromboth state and Commonwealth governments to assume greater responsi-bilities for service delivery and infrastructure maintenance. At the sametime, municipalities encounter severe restrictions on their revenue-raisingcapacity. The inevitable result of escalating costs and constrained fundingis a growing ‘community expectations/funding gap’ that threatens thevery future of efficient and responsive local government in Australia. Afterconsidering the nature of the financial problems afflicting Australian localgovernment, Johnson examines a number of significant expenditure pres-sures, including the devolution of functions from higher tiers of govern-ment, ‘raising the bar’, cost shifting, increased community expectationsand inefficiency in municipal operations, as well as the CommonwealthFinancial Assistance Grant system. Various methods of ‘managing theproblem’ are outlined, not least dampening expectations, improved effi-ciency and transparency, and financial assistance from higher levels of gov-ernment to accompany the devolution of responsibility.


In Chapter 4, Christine Ryan deals with the financial reforms under-taken in Australian local government over the past decade and the cur-rent state of financial reporting by councils. A cornerstone of thesereforms lay in the shift away from cash-based accounting methods toaccrual accounting. The accounting standard set out in AAS 27Financial Reporting by Government has been mandated by almost alllocal government regulators in Australia and obliges municipalities toreport on an accrual basis and value assets at current cost. A major fea-ture of AAS 27 is its assumption that local government authorities havegeneral-purpose users: that is, users who wish to know about the finan-cial affairs of councils and who do not normally have access to financialinformation. A second important attribute of AAS 27 resides in the factthat it uses the same framework to develop private and public sectoraccounting standards. Ryan questions the appropriateness of both ofthese characteristics for Australian local government. She argues thatthe massive diversity of local government in respect of size, asset baseand geographic location may mean that a ‘one-size-fits-all’ financialmodel may not be optimal. In particular, one of the chief purportedadvantages of the application accrual accounting standards to local gov-ernment was supposed to be comparability of financial informationbetween different councils. Ryan examines how problems associatedwith the valuation of assets, depreciation and revenue recognition havecomplicated this goal.

In Chapter 5, Paul May tackles the explosive issue of local govern-ment amalgamations in Australia. After reviewing the scale of Australianmunicipal consolidation from 1910 through to 2001, May conducts adetailed evaluation of the various factors underlying the case for fewerand larger local authorities: in particular, he develops a very useful dis-tinction between ‘primary motivational factors’ and ‘secondary motiva-tional factors’. The chapter then discusses tensions arising from thepurported trade-off between economic efficiency and local democraticrepresentation, a problem that goes to the heart of the controversy sur-rounding amalgamation. The related question of potential economiesof scale and scope that may derive from larger local government isexamined, together with the thorny empirical issue of whether it is pos-sible to identify an ‘optimal’ size for local government. In contempo-rary policy debates some commentators have sought to avoid‘all-or-nothing’ policy choices between larger, more ‘efficient’ councilsand their smaller, more ‘responsive’ counterparts by proposing the concept of ‘virtual councils’. May explores this line of argument fully,


pointing out its similarities with earlier ‘resource-sharing’ suggestionsalso aimed at reducing potential trade-offs between economic efficien-cy and democratic participation in local governance.

In Chapter 6 Rosemary Kiss disputes the widely held perceptionthat the local government reforms of the 1990s reinforced communityparticipation and constituent involvement. Rather, she suggests, statelegislative changes in fact weakened the democratic legitimacy of thethird tier. There are two dimensions to her argument. First, the notionof ‘community’ has become so vague as to be meaningless. The conceptcan be easily redefined by committees of inquiry in terms of particularinterests, or as circumstance demands. Moreover, community can beclaimed by both state and federal agencies; it is no longer the preserveof municipalities. The extent to which the concept of community hasbecome devalued, Kiss claims, is evident in the amalgamation programsof the 1990s where it seemed to count for little. Second, Kiss assertsthat citizen participation cannot become a substitute for representativedemocracy. Councillors alone are responsible for making decisions andit is therefore vital that the manner of their election has integrity. Kissdemonstrates that this is not so. While other levels of government arebased on citizenship and residence in an electoral district, local govern-ment in many states is subject to property-based, non-resident pluralvoting. Kiss concludes that local government in Australia will not beconsidered a sphere of democratic government until proper representa-tive democracy is restored.

In Chapter 7 Jeff Baker considers the nature of the managerial rev-olution that has substantially altered the way Australian local govern-ments operate over the last decade or so. Baker explains how thetraditional bureaucratic hierarchies on which councils were based in theearly 1980s have given way to the precepts of the NPM. Municipalactivity is now shaped by a corporate ethos embracing such features ascorporate planning, performance measures, an emphasis on genericexecutive skills, and devolution of authority. He argues that the newmanagement style has been shaped to a considerable extent by legisla-tive changes and policy initiatives imposed by higher levels of govern-ment. Despite the influence of state and Commonwealth agencies,however, Baker points out that individual councils have themselvesoften taken the lead in terms of introducing new strategic initiatives.The second half of the chapter looks first at the Victorian experience,and then considers the impact of National Competition Policy (NCP)on the other states. Victoria is singled out for analysis because of the


radical nature of the reform program which was implemented, particu-larly compulsory competitive tendering. The manner in which NCP hasaffected the function of local governments in the other states and terri-tories is explored in some detail by Baker. The chapter concludes witha discussion on the need to integrate efficiency concerns with democra-tic principles.

In Chapter 8 Neil Marshall explores the nature of the relationshipbetween chief executive officers (CEOs) and councillors in local govern-ment. This has been a problematic issue within the sector for a long time.State legislation enacted during the 1990s attempted to resolve theproblem by clarifying the respective roles and responsibilities of electedmembers and senior management. Marshall argues that the outcome ofthis attempt was only partially successful and significant obstacles remain.The functions that councillors are expected to carry out have becomevery demanding and are simply beyond the capacities of many citizens tofulfill. Consequently, when in office, such people become heavily depen-dent upon the CEO for advice and direction. Normally this situationwould place the CEO in a position of considerable power within thecouncil. The move to contract appointments, however, has left the seniormanager in a much more uncertain and vulnerable position. The overalloutcome is that the relationship that develops between councillors andCEOs may be less than constructive and can create real difficulties forthe operation of the municipality. Marshall suggests that one way ofresolving this problem is to move towards a corporate governancemodel. Such an approach, he asserts, will not only improve effectiveness,but also help to strengthen democratic values.

In Chapter 9, Joe Wallis examines the role of policy networks andpolicy entrepreneurs in the development and evolution of local govern-ment policy in Australia. Markets, hierarchies and networks can all beseen as alternative solutions to the horizontal coordination problemsthat arise when the relationship between local authorities and both cen-tral and state government agencies and non-government organisationsis characterised by ‘resource dependency’. Under the federal system ofgovernment in Australia, the problems of resource dependency areexacerbated by a high degree of vertical fiscal imbalance, with theCommonwealth government accruing most revenue and then dispens-ing some of these monies to state and local governments. Wallis arguesthat policy networks might enable local governments to alleviate theresultant burdens of ‘doing more with less’ by involving themselves in‘multi-organisational partnerships’. He considers the problems inherent


in coordinating these implementation structures, before undertaking acomparative institutional analysis of markets, hierarchies and networksas alternative governance mechanisms. The analysis then focuses on thecapacity of Australian local government to deploy each of these differ-ent mechanisms.

In Chapter 10, Andrew Worthington examines the question of eco-nomic efficiency in Australian local government and its empirical mea-surement. After a brief outline of the theory of efficiency measurement,the chapter provides a synoptic review of the different techniquesemployed for the measurement of local public sector efficiency. Theauthor then investigates the various ways in which public sector provi-sion of services differs from that of the private sector and the implicationsthese differences hold for the measurement of efficiency in local govern-ment. The chapter then provides a very useful survey of the literature onthe empirical measurement of inefficiency in local public services, bothin Australia and elsewhere. With this empirical evidence in mind, the dis-cussion focuses on the determinants of local government efficiency. Thechapter concludes with various caveats concerning the application andinterpretation of efficiency measurement in the context of a highly dif-ferentiated local government system, such as that found in Australia.

In Chapter 11, Brian Dollery draws on the generic phenomenon of‘government failure’, or ‘the inability of public agencies to achieve theirintended aims’, and seeks to apply this public choice approach to theproblem of local government failure in Australia. The chapter beginswith a review of the relevant literature on government failure in generaland local government failure per se. He then develops a new five-foldtaxonomy of local government failure that includes ‘voter apathy’,‘asymmetric information and councillor capture’, ‘iron triangles’, ‘fiscalillusion’, and ‘political entrepreneurship’. In contrast to the convention-al wisdom, which holds that government failure is likely to be more acuteat higher levels of government, he contends that municipal councils areespecially susceptible to local government failure, despite being ‘closer tothe people’. Moreover, this can substantially impair their capacity todeliver and provide services efficiently. The typology developed byDollery provides a very useful conceptual tool for Australian local gov-ernment policy makers to employ in any analysis of actual councils.

Finally, in Chapter 12 Brian Dollery and Neil Marshall draw togeth-er some of the broader insights which have emerged from the preced-ing contributions and ponder desirable future directions for the sector.The first part of the discussion assesses recent achievements in the areas


of management, democracy and finance, and considers some of theproblematic issues that remain to be confronted. The second half of thechapter looks at possible ways of meeting these concerns. In particular,it is suggested that developing sound intergovernmental consultativebodies in the form of state–local government partnerships, and linkingsuch structures to regional organisations of councils, offers a construc-tive way forward. So too is enhancing the efficiency and effectiveness ofmunicipal service delivery by entrenching the principle of comparativeadvantage in all of its operations. The chapter concludes by emphasis-ing the need to raise community awareness about the value of local gov-ernment through wider public discourse and establishing relevantuniversity studies.

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PA R T A I N T E R N AT I O N A L

C O N T E X T

An international survey of local government reveals a wide variety oforganisation and governance models, but despite this diversity, reformtrends of the last twenty years suggest a convergence in thinking aboutsolutions to common problems. Key among these trends has been struc-tural reforms which target jurisdictional arrangements and represent, insome cases, a significant departure from traditional approaches to localself-government and administration; and process reforms that focus onpolitical and administrative action. Structural reforms include a reor-ganisation of functions between levels of government and a redrawingof boundaries, often to create a new space for regional level govern-ment, a feature of reform developments in several countries in recenttimes. No less significant have been the numerous changes in process,which include administrative and management reforms on the onehand, and political reform (electoral and leadership changes) on theother. Australian local governments have not escaped these globaltrends, and over the last twenty years have experienced wide-rangingreforms (in varying degrees in different states) embodying all of thesedimensions, as the chapters in this volume testify.

This chapter examines one aspect of the reforms, often described inthe literature as ‘new public management’ or NPM, a powerful conceptand set of practices which has gripped national governments in manycountries world wide.1 Equally, in the closing decades of the twentiethcentury, new management and governance ideas had a wide appeal andimpact on local government. Ideas about ‘institutional standards’ and‘what is a good organisation’ became paramount and were encapsulat-ed in the NPM doctrine. New public management can be summarised

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L O C A L G O V E R N M E N T: R E F O R MI N C O M PA R AT I V E P E R S P E C T I V E

Janice Caulfield

as a new instrumentalist view of bureaucracy and an approach centredon management rather than the traditional approach to administrationbased on public law. Hood (1996) has identified seven elements or‘dimensions’ of NPM as follows:

1 variations in the degree of hands-on management (that is, the degree of

active control of public organisations by visible top managers wielding

discretionary power);

2 variations in the degree to which public organisations operate with explicit

and measurable (or at least verifiable) standards of performance in terms of

the range, level and content of services to be provided;

3 variations in the degree to which public organisations are controlled by

output measures (particularly in pay-based, on-the-job performance rather

than rank or educational attainment;

4 variations in the degree to which public organisations are disaggregated into

separate self-contained units, rather than operating as a single aggregated unit;

5 variations in the degree to which organisations within the public sector for-

mally compete with one another and with private organisations for the pur-

suit of particular tasks, rather than having semipermanent ‘ascribed’ roles;

6 variations in the degree to which organisations within the public sector

conduct business or use management practices that are broadly similar to

or different from those employed in the private corporate sector;

7 variations in the degree to which public sector management stresses

discipline and parsimony in resource use.

Most usually portrayed in local government discourse as a ‘moderni-sation and efficiency’ agenda, its features are in most cases identical tothose identified by Hood. To Hood’s list can be added an eighth dimen-sion which has a particular resonance for local government. This dimen-sion may be called ‘clientalism’ and refers to the recasting of citizens asclients, a popular and parallel development in NPM. Clientalism includesa range of techniques designed to engage the taxpayer as consumer ofgovernment services and thus, it is argued by the reformers, to impose adiscipline on the provider of those services. The techniques used includepublic consultation, citizens’ charters, performance pledges, stakeholderengagement through partnerships and the like. Clientalism as a reformfeature is not exclusive to the local government sector, but it has possi-bly been given greater emphasis at the local level because, in many coun-tries, the bulk of public services are provided by local government.

1 4 • I N T E R N A T I O N A L C O N T E X T

What does the global trend to NPM tell us about the changing natureof local government? In a recent publication, Helge O. Larsen and myselfmade the case that there is a strong normative aspect to local governmentreform (Caulfield and Larsen 2002). Following Meyer and Rowan(1977), we argued that the quest for legitimacy is a dominant one forlocal government, but that legitimacy cannot be achieved by attendingonly to functional requirements and the technical environment. In theirefforts to maintain legitimacy, local governments window dress in orderto be in tune with the institutionalised norms and standards that are dom-inating in their environment. In this sense, the ‘reform movement’ itselfillustrates a convergence, if only by means of a policy fashion. There is,however, a more practical set of explanations for the popularity of man-agement reform and the direction it has taken. Local governments of theperiod since the global economic crisis of the 1970s have faced two con-flicting pressures. The first is declining revenues; intergovernmental trans-fers and the ability to tax have diminished while demands for increasedservices have continued to grow. The second has been rising expectationson the part of citizens for improved public services. This has beendescribed as an ‘equalling up’ of public expectations derived from experi-ence of private sector services and imported into public sector contexts(Pollitt and Bouckaert 2000). For the reformers, the solution has been toorganise government in such a way that more can be achieved for less orat least a belief in the possibility. In this respect, there has been a notableconvergence across countries of problems faced and solutions available,especially those with an NPM flavour.

The aim of this chapter is not to describe the reform experience ofother countries in great detail, but rather to offer a comparative look atdevelopments and consider how cross-national variations in the uptakeof NPM might be explained and what this can tell us about local gov-ernment systems more generally. Such a perspective implies, in the firstinstance, attention to methodology, which means identifying suitablevariables and indicators of comparison. There have been severalattempts made by others using the comparative method to explain thewidespread adoption of NPM at the national level. With the exceptionof some casual comparative observations, however, no systematic cross-country comparisons of NPM’s development within the local govern-ment sector have so far emerged (Bekke et al, 1996; Pollitt andBouckert, 2000; Schedler and Proeller 2002). What this kind of analy-sis requires is the development of some cross-national indicators ofreform and the identification of a set of independent variables that have

L O C A L G O V E R N M E N T : R E F O R M I N C O M P A R A T I V E P E R S P E C T I V E • 1 5

a universal application and against which a ranking of countries accord-ing to their NPM status can be measured. To achieve these aims, I haveborrowed from the work of Christopher Hood (1996), who adopted asimilar method in testing hypotheses about new public sector manage-ment in relation to national governments. However, unlike Hood, whowas able to look for answers in a much greater available range of statis-tical information (such as GNP figures and individual country respons-es to OECD questionnaires), local government data that allows forsystematic cross-national comparison is more limited.

Notwithstanding these limitations, there is data available in a size-able number of country-specific case studies which describe new man-agerial reforms at the local level. The picture drawn from these studiesshows considerable diversity among local government systems in theadoption of NPM, but a diversity that reveals within it clear patterns ofdevelopment. For example, in the Anglo speaking countries it is nation-al governments that have typically been the ‘leaders’ in NPM develop-ment (or at least the initiators of reform), while in other nationaljurisdictions it is local government that has lead the way (mostContinental countries for example). These country variations give us anopportunity to examine public management reform and speculatewhether it is, indeed, a converging process or is contingent on nationalfactors. Various theories have been advanced for what drives reform:economic hardship, imitation, competition between governments and,as suggested above, the need to seek legitimacy in an environment ofpublic distrust. While these are plausible arguments, for purposes ofcross-national comparison they are difficult to measure.

An important variable in local government, which may act as abenchmark and help shed light on the question of why one local gov-ernment system is a ‘leader’ in managerial reform while another remainsa ‘laggard’, is that of local autonomy2. The concept of autonomy arosefrom notions of political separateness in local government, its adherentsarguing that because local government is closest to its citizens, it is inthe best position to represent their interests. While this ‘grass roots’notion of democracy assumes an autonomy and freedom from interfer-ence by higher tiers of government, in practice this has rarely been thecase. Any examination of central-local relations, be it administrative orfinancial, shows real limits to local autonomy. In all countries, central-local relations are at the heart of the local government reform experi-ence, if not directly at least implicitly. Reform agendas are oftenimposed on local government by national and regional governments,


and for this reason local government has typically been seen as highlysubordinated. On the other hand, local autonomy continues to be animportant legitimising principle for local government, and recent struc-tural reforms have lead some commentators to see the intergovernmen-tal relationship as one of ‘negotiated partnership’ rather than ascentrally directed (Baldersheim, 2002). Local government reformerstoo, have seen local democratic vitality as a necessary corollary of man-agerial and boundary reforms (Marshall and Sproats 2002).

The question then becomes one of how to measure local auton-omy. While autonomy may be represented along several dimensions(constitutional, political, financial), finding adequate and compre-hensive cross-national data which can be measured is extremely diffi-cult. One, immediately available source comes from the OECD,which collects local government finance statistics on an annual basis(OECD Revenue Statistics for Sub-central Governments). A widelyused indicator of fiscal autonomy has been the degree of discretionlocal government has over its revenue source. This is typically mea-sured by the size of a local government’s ‘tax share’ of its total bud-get. It is recognised by the OECD, however, that fiscal autonomy isa more complex matter and that ‘tax share’ in itself is not a com-pletely satisfactory indicator of financial autonomy. Accordingly,autonomy is seen to be greatest in countries where local governmentsare free to determine both the taxable base and the rates of a partic-ular tax, without any aggregate limits on revenues, base or rateenforced by the central government (OECD 1999a). The OECD hasestablished five categories of tax autonomy, in descending order asfollows:

1 local government sets tax rate and tax base

2 local government sets tax rate only

3 local government sets tax base only

4 tax sharing arrangements

(a) local government determines revenue-split

(b) revenue-split can only be changed with consent of local government

(c) revenue-split fixed in legislation, may unilaterally be changed by cen-

tral government

(d) revenue-split determined by central government as part of the annual

budget process

5 central government sets rate and base of local government tax


While some work has been done on these more sophisticated mea-sures of fiscal autonomy (OECD 1999b), the comprehensive data setstill relies on the simple measurement of ‘tax share’. There are, howev-er, two other revenue categories from the OECD annual data whichhelp to give a more complete picture of fiscal autonomy. These are:

(a) non-tax sources of revenue (fees, charges etc.)

(b) grants from central government

Non-tax sources of revenue, while still only a relatively minor part oflocal government budgets, have been of growing importance for manycountries in recent times. The problem of declining local revenues in the1990s was partly ameliorated in some countries by a substantial increasein fees and user-charges. In North America, user-charges are viewed asboth highly efficient and politically acceptable on the presumption that,unless the service provided is a pure public good or the policy intentredistributive, then local services should be charged for (Bird and Slack1991). Countries which have relied most heavily on ‘non-tax’ forms ofincome are Finland, the Netherlands, United Kingdom, Ireland, Austria,Germany, and Switzerland. In Finland, non-tax revenue more than dou-bled between 1980 and 1995. In Norway, the Netherlands, France andSpain there was also growth, although not of the same magnitude. Tothe extent that they have been able to expand their non-tax source ofrevenue, local governments in these countries have demonstrated resid-ual powers of fiscal autonomy. By contrast, in Sweden and Iceland therewas a marked decline in non-tax revenue as a proportion of own-sourcerevenue over the same period. In the United Kingdom and NewZealand, there was also a marked decline, but in these latter cases, pri-vatisation of local government enterprises has been a major contributingfactor (Stoker 1999; Martin 1991).

Central government grants, on the other hand, have negative impli-cations for local autonomy, although this will vary depending on theform in which the grant is given, for example, tied or untied, and theformula used for distributing the grant. The proportion that grants rep-resent in the total local budget is also an important factor.Intergovernmental transfers constitute at least 30 per cent and more oflocal budgets in most countries. Belgium, Canada, Denmark and Spaindepend for close to half their revenues on grants, whereas for Norway,France and the United States grant income is around 40 per cent. Themost heavily grant dependent countries are the United Kingdom, The


Netherlands and Ireland, where approximately 70 per cent of revenuecomes in this form. Australia, Austria, New Zealand, Sweden andIceland receive 20 per cent or less of their revenues in grants. Grants arenot to be confused with stable tax-sharing arrangements (where a cen-tral government will act in an agency capacity in the collection andremission of taxes), but are rather monies allocated on the basis of dis-cretionary choices made by central government (Smith 1996).

Regardless of the form in which grants come, they remain a contro-versial aspect of local fiscal autonomy. An over reliance on funding fromcentral government can undermine planning and weaken local policycapacity. Programs established on the promise of grants have collapsedwhen funding is scaled down. Grants have also been used by central gov-ernments to regulate local taxing powers. Following a shift to block grantsin Sweden, for example, local authorities found that central governmentused the grant to punish councils that increased the tax rate beyond a cen-trally determined level3. In the United Kingdom, grants have been usedto impose sanctions on local councils that do not conform to centrallydetermined spending levels (Barnett 1998). Some commentators haveportrayed central government grants as ‘a violation of the right to localself-determination’ (Netherlands Scientific Council Report 1990).

The proposition of this chapter is that fiscal autonomy, as an impor-tant measure of local autonomy more generally, may be a significant fac-tor in the adoption of NPM reforms by local governments, and thushelp to explain cross-national variation.

The chapter proceeds first with a discussion of NPM reforms withinselected countries considered the most advanced in NPM development.Second, these countries and selected others from the OECD are rankedin terms of their local government systems’ development of NPM. Third,each will then be compared to its level of autonomy, measured in fiscalterms. The first part of the analysis draws on specific cases to identifywhich of the five elements of NPM (listed above) have been implement-ed. The countries are then ranked as having high, medium or low NPMdevelopment. This is determined by how many of the dimensions ofreform each country’s local government has emphasised. Those countrieswith six or more elements are ranked ‘high’ on NPM development, thosewith two to five elements are ranked ‘medium’ and those with one or lessare ranked ‘low’ (Table 2.1). The size and tasks of local authorities with-in a single country may vary, considerably, which in turn may affect howfar individual authorities have implemented reform. For the purpose ofthis chapter, however, internal variation is not a consideration, save to say


that most countries reveal a dominant pattern. The countries selected foranalysis are drawn from the OECD member states but, due to limitationsin the data available, do not include all member countries. The countriesrepresented here are those for which data is available on both NPM devel-opment or not, and available revenue statistics. The revenue data, whichis presented in the second part of the analysis, takes two points in time,1980 and 1995, and not only shows the degree of fiscal autonomy thatpertains for each country, but allows us to see what change has occurredin the fifteen year period. This period roughly coincides with the decadeof most intense reform. It may be the case that low-ranking countries willhave developed NPM post 1995 but, for the purpose of this chapter, it isthe period in which the first wave of NPM reform occurred and shouldindicate better than later periods if there is a causal relationship betweenthe variables.

U N I T E D K I N G D O M

Recent British experience of NPM has perhaps held most interest forAustralian local government reformers. The ‘Best Value’ regime, intro-duced by legislation in the British Parliament in 1999, carried muchpromise as a more inclusive approach to reforming the local governmentsector than did the previous Conservative government’s CompulsoryCompetitive Tendering (CCT) regime, which was subsequently deemeda failure (Stoker 1999). Inclusiveness, however, amounted to little morethan central-local consultation in an environment of financial incentivesheld out by the national government, both of reward and punishmentfor compliance or non-compliance. Moreover, Best Value ‘runs widerand deeper’ than did CCT (Audit Commission 1998, cited in Martin2002). There is no doubt that local government in the United Kingdomhas gone furthest and perhaps faster than other national local govern-ments in implementing new public management. Best Value includes atleast seven dimensions on the NPM scale, including performance man-agement, output controls (national performance audits), disaggregation(e.g. housing trusts), competition (competitive tendering), private sectormanagement practices (e.g. benchmarking), cost cutting and clientalism.On this last dimension, British local government now has a legal duty toconsult with all manner of groups who have ‘an interest in any area with-in which the authority carries out functions’ (HMSO 1999: clause 3.2,cited in Martin 2002). Thus, New Labour seeks to control local gov-ernment just as vigorously as did the Conservatives before them (Peters1998).


A U S T R A L I A

In Australia, an early and perhaps most visible sign of NPM developmentin local government was the emphasis placed on hands-on management(Hood’s dimension one) or to use the popular idiom, ‘letting the man-agers manage’. Council ‘town clerks’ became ‘general managers’ whosejob it was to think strategically, be proactive and most radical of all, insome states following legislation, assume the role of chief executive offi-cer of the council (Jones 2002). These early changes in leadership weredesigned to facilitate other NPM type reforms, including the introduc-tion of performance management, competitive tendering (one Australianstate, following the United Kingdom lead at the time, made it compul-sory), adoption of National Competition Policy requirements, andresource parsimony (Marshall and Sproats 2002; Aulich 1999; Johnston1997). Corporate management models were widely adopted along withoutput measures based on structural efficiency principles, which tradedpay increases for more flexible work practices. There was considerablevariation between and within states as to how quickly and how radicallyNPM was adopted by local government. Nevertheless, the principleshave been universally applied to the extent that local government inAustralia can been seen a leader in the managerial revolution. Clientalismtoo has been an important element of local government reform, notablythrough its incorporation in corporate planning exercises (Marshall andSproats 2002). Other developments have included public forums,precinct committees and customer charters.

While the federal government has no direct legislative control overlocal government in Australia, it has exercised considerable influence inthe reforms through Commonwealth-state cooperative mechanisms(see Chapter 7 in this volume).

N E W Z E A L A N D

In New Zealand, local government reform has been extensive but with agreater emphasis placed on structural adjustment than on managerialismper se. The economic orientation of wider public sector reform was pur-sued no less aggressively at the local level where market discipline washeld up as the panacea. The emphasis here was on cost transparency andaccountability where subsidies were interpreted as creating allocativeinefficiencies. A belief by the reformers in market discipline led to sub-stantial privatisation and corporatisation of government activity. Thedevelopment of Local Authority Trading Enterprises, as part of the


structural reforms, meant the disaggregation of units previously part ofthe local authority into separate commercial units. Within these units,the other elements of NPM were rigorously implemented. Legislativechange in the mid 1990s strengthened the financial accountability andtransparency of local authorities by effectively doing away with centralgovernment subsidies and forcing a greater use of user pays mechanisms.The development of a system of ‘top managers’ within councils was alsoan important aspect of the reforms, ensuring a clear separation of gover-nance and management roles. (Drage 2002; Howell 1997). In parallelwith the experience in other Anglo countries, the New Zealand reformsplaced a heavy emphasis on clientalism. The principle of public partici-pation and scrutiny of local government was advanced by the reformersthemselves and encouraged an active engagement by academics andcommentators on the value of deliberative democracy (Cheyne 1999).

G E R M A N Y

What sets the European Continental countries apart from the Anglocountries is that in almost all cases where NPM reforms have been imple-mented locally, they have developed at the grass roots, so that nationalgovernments have been followers and/or facilitators rather than leaders inthe reforms. Germany is a case in point where the principle of local self-administration provides considerable scope for local authorities to regulatetheir own affairs. It was the German municipal association of managementreform, the KGST, which pushed NPM type reforms in response to a‘constellation of factors’ (Wollmann 2002)4. These included fiscal pres-sures, actors’ perceptions of problems and search for solutions, and the‘takeover’ of discourse by NPM modernisers within the sector. The keyinitial focus of reform was on internal reorganisation, specifically, disag-gregation and autonomisation designed to increase managerial responsi-bility and break the legalistic, hierarchical mould of Weberian bureaucracyfor which local government in Germany is traditionally known (Loffler1995). The second, related step was to shift the budget emphasis frominput controls to output controls with the introduction of global budget-ing. This shift in focus was accompanied by a set of performance measuresor ‘indicators’ of local government ‘product’ intended to make transpar-ent local government resource expenditures (Wollmann 2002). The man-agerial reforms were followed by reform of ‘social administration’, that is,participatory procedures and the establishment of ‘citizen centres’. Somecity authorities have actively engaged their citizens in developing the city’smission statements (Schedler and Proeller 2002).


T H E N E T H E R L A N D S

Reform of German local administration was inspired by the experienceof the famous Dutch case of the city of Tilberg which radically reformedits local administration in the 1980s along private sector lines of decen-tralised ‘holding companies’. The Netherlands was a leader in thereform movement in Continental Europe, not just locally but publicsector wide. National reforms focused on ‘functional decentralisation’in the pursuit of efficiency gains and a rationalisation of public expen-ditures. Locally the emphasis was on a ‘concern division model’ (hold-ing structure), and contract management. Thus, disaggregation intoseparate, self-contained units, hands-on management and internal mar-kets formed the core elements of NPM as it developed in Dutch localgovernment. A later reform development was involvement of the citi-zenry in such areas as service delivery and neighbourhood management,although this was less an NPM reform than (in part at least) a reactionto it (Schedler and Proeller 2002).

S W I T Z E R L A N D

Switzerland, like Germany, is a federal state wherein the ‘cantons’equate with the lander, and it was at this cantonal level where NPMreforms first took hold, eventually spreading to the municipal level.Schedler and Proeller (2002) found, as in the German case, that thereformers came from the ranks of public administrators where a coregroup perhaps supported by one or two politicians led the develop-ment of NPM. The major focus of the reforms has been on strength-ening the hand of managers vis-a-vis political leaders, or at leastredefining roles and responsibilities. ‘Results-oriented PublicManagement’ was the term given to the Swiss reforms, but imple-mentation, with some exceptions, has tended to be confined tohuman resource management. Nonetheless, concerns underlying thepressure for reform such as opaque outputs and impacts, inflexibili-ties caused by a lack of market pressure and political over-control ofoperative decisions remain important drivers for reform (Schedlerand Proeller 2002). Privatisation has not been a feature of the Swissreforms. Internal variation that is perhaps worthy of note is thatwhich follows the linguistic division of the country. The Frenchspeaking areas of Switzerland, as is the case with Belgium (see below)have been less inclined to adopt NPM strategies than have theGerman speaking areas.


S W E D E N

Among the Northern European countries Sweden stands out as a leaderin NPM reform. In common with its Nordic neighbours, the Swedishsystem of municipal government carries a major responsibility for socialwelfare. The expansion of welfare state services according to Montinand Amna (2000) ‘can be re-conceptualised as a municipal welfareexpansion’. Swedish local government enjoys a strong level of autono-my, constitutionally and financially, from the central government buthas been described as an integrative central-local government system(Kjellberg, 1988). Fiscal stress and deficit budgets, following economicrecession in the early 1990s, and high unemployment unquestionablycontributed to the development of NPM in local government.However, privatisation reforms (including contracting out) had com-menced in the late 1980s and followed a pattern of decentralisationwhich began some years earlier with the ‘free commune experiment’(Baldersheim and Stahlberg 1994; Haggroth et al. 1999). A majorthrust of the ‘third wave’ of reforms (encapsulated in the new 1991Local Government Act) was to delegate to a professional class of man-agers greater decision-making power and hands-on management, whilestrengthening the role of political officials in strategic decision-making(Montin and Amna 2000; Kleven et al. 2000). Management byObjectives (MBO) and Results Oriented Management (ROM) weretools adopted towards this end. Performance measurement and bench-marking are more recent developments in Swedish municipalities, andthe Association of Local Authorities has developed methods for mea-suring the attitudes of local residents toward municipal services.Another development has been the privatisation of some portions of thesocial services such as housing and nursing care (Haggroth 1999).

N O R T H A M E R I C A

Reform of local government in the United States in the 1990s followeda long established political ideal in American politics, which may beencapsulated in the phrase ‘small is beautiful’. While the ideas of NPMfirst found voice and a willing audience in the United States, especiallyat federal and state levels5, what characterises local government admin-istrative reform of the period was large-scale cut-backs and privatisa-tions. Many traditional functions of local government were eithersold-off to the private sector or contracted out using a variety of forms,including the use of franchises, grants, vouchers or agreements


(Hrebenar 1998). Couched in politically acceptable jargon, ‘load-shar-ing’ meant contracting out services such as waste-disposal, traffic man-agement systems and airports. An alternative concept, ‘cost-sharing’,was adopted by some city governments who privatised their jails andeven tax-collection agencies. These reforms were in large measure aresponse to tax revolts by the public, the first documented example ofwhich is the infamous Proposition 13 introduced by the State ofCalifornia in 1978 (O’Sullivan 1995). Concerns about ‘public choice’also led to other reforms in some local jurisdictions such as the vouch-er system for locally run schools (Hrebenar 1998).

Later reform development placed more emphasis on ‘resizing’ than‘downsizing’ and introduced ‘managing for results’ as key concepts ofNPM reform. To some extent this softer approach reflected a change inreform policies nationally, following a change in political leadershipfrom the Reagan/Bush administrations to the Clinton/Gore govern-ment; a trend mirrored in Britain following the change from aConservative to a Labour leadership. Unlike in Britain, however, localgovernment in the United States appears to have more choice in adopt-ing NPM reforms. This is, in part, explained by their different politicalsystems, that is, federal and unitary, but perhaps more so by a traditionin American politics of non-intervention by higher levels of government(Norris 1997). Thus, the uptake of performance management by localgovernment is highly variable and has been described as ‘evolutionary’rather than ‘revolutionary’ (Bernstein 2001). Notwithstanding, there isno doubt that governments at all levels in the United States, local gov-ernments included, have been leaders in the field of NPM development.

While Canadian reforms at the national level have been ‘middling’(Hood, 1996), Canadian municipalities have not embraced NPM ashave their Anglo speaking cousins. Where reform has happened it hasbeen a local response to a particular problem such as in service delivery.The city of Montreal’s ‘single window’ initiative for example, whileimproving customer relations, was not part of a wider NPM style ‘clien-talism’ (Seidle 1995). Quite dramatic reforms have occurred inCanada’s local government sector of late, but these have been jurisdic-tional changes, for example, the return in force of the unicity, combinedwith municipal consolidations (Collin et al. 2002; Sancton 2002).

J A P A N

Japanese local government presents a quite different case, which, inNPM terms, cannot be considered a leader of reform. Nonetheless it


deserves a mention here a) because it is experiencing for the first timesome genuine reform effort to strengthen the sector, and b) it reflects apattern not dissimilar to its Asian neighbours, especially Korea. Despitea long history of a centralist state, decentralisation reforms in recenttimes have facilitated an entrepreneurial spirit at the local level andgreater citizen involvement in policy appraisal processes (Akizuki 2000).Although Japan’s local government has constitutional recognitionwhich, in theory, guarantees it political independence and administra-tive autonomy, it has been tightly controlled by central governmentsince 1947, both in a legal (national law over-rides) and financial sense(58 per cent of the local budget comes in the form of a direct grant)(OECD 1999b). What are known locally as ‘agency delegated func-tions’, where central government ministers have a mandate to directlocal government action, have characterised Japanese post-war localgovernment (Koike 1998).

Global shifts and economic pressures in the late 1980s and early1990s led to a number of national enquiries that resulted in the enact-ment of The Law for the Promotion of Decentralisation. Currently localgovernments in Japan are responsible for more than half of total gov-ernment services (Nakamura 2002). Financial arrangements in theintergovernmental system, however, remain largely unreformed, leadingsome analysts to scepticism about the decentralisation efforts (Kitahara1998; Dairokuno 1998). Continuing fiscal pressures and local budgetdeficits, especially in large city governments, have been the major influ-ences on a grass-roots search for new ways of managing. The MiePrefectural government led the way in introducing NPM type reformsthat were locally interpreted as ‘client centred’. Key strategies in thereforms were to create a more transparent and responsive administra-tion based on freedom of information and performance review(Nakamura 2002). Other reform ideas, including performance pay,benchmarking and outsourcing, have entered the discourse in Japan’slocal government but are yet to be developed. Mie remains the excep-tional case in Japanese local government reform.

O T H E R O E C D C O U N T R I E S

France, Spain, Belgium, Italy, Norway and Finland are countries inwhich NPM reforms have either not been developed, or have beendeveloped in a minimal way, being looked on with either scepticism orcaution (Schedler and Proeller 2002; Larsen and Offerdal 2000).6

Belgium’s pattern of development is more variable wherein the Flemish


speaking part has been more enthusiastic about NPM reform than hasthe Walloon (French speaking) area. In the Nordic countries someattention has been given to ideas of ‘total quality management’ andthere has been development at the local level in this direction. Morerecent development towards the use of internal markets and adoptionof purchaser-provider models has also been a feature, but one that hasdeveloped unevenly across municipalities. While efforts have been madeto encourage greater participation by citizens in local government,clientalism is not favoured because of the widespread belief that itundermines representative democracy (Kleven et al. 2000).

TABLE 2.1 NPM DEVELOPMENT BY COUNTRY



T H E D A T A

Measuring local government fiscal autonomy must rely on the simplemeasure of local government tax used by the OECD although, as dis-cussed earlier, some work has been done by the OECD on a moresophisticated interpretation of local tax. In figures 2.1 and 2.2, I havecombined ‘tax’ with ‘non-tax’ sources of income (e.g. fees and charges)as these are locally generated and represent a residual power of localgovernment to act autonomously. The combined values are represent-ed thus as ‘own-source’ revenue. Figure 2.2 compares this categorywith ‘total revenue’ for local government country by country for theyear 1995, measured as a per cent of GDP. The difference between thetwo categories, that is, ‘total’ and ‘own-source’ represents the propor-tion of central government grants in the budget, and thereby eachcountry’s level of fiscal dependence. This dependency is more starklyportrayed in Figure 2.1, which shows own-source revenue as a per centof total local revenue. Figure 2.1 also shows the degree of change inown-source revenue for each country over the fifteen-year period 1980to 19957. It should be noted that the variation between countries interms of their relative income (Figure 2.2) reflects variation in func-tional responsibilities. For example, the Nordic countries’ much largerbudgets reflect their vastly greater responsibility for welfare provision.Variation in budget size is not of particular interest here8, but rather thelevel of fiscal autonomy, or ‘own-source’ revenue as a percentage of‘total income’ on the one hand, and on the other, changes thatoccurred over the period.

In Table 2.2, these indicators of autonomy are combined with eachcountry’s level of NPM development. Countries whose own-sourcerevenue is above seventy-five per cent are rated as having ‘high’ fiscalautonomy, while countries whose own-source revenue is less than fiftyper cent are rated as having ‘low’ fiscal autonomy. Countries that fallbetween these values are given a rating of ‘medium’ autonomy.

A N A L Y S I S

The cross-variable data presented in Table 2.2 shows patterns that may beconsistent with the proposition that the level of fiscal autonomy a coun-try’s local government has is a significant factor in the development ofNPM strategies. The data from the United Kingdom, Ireland, TheNetherlands and Belgium and to a lesser extent, Germany and the UnitedStates, suggest that countries with low fiscal autonomy are more inclinedto search for strategies to alleviate stress from fiscal dependency. All of


FIGURE 2.1 LOCAL GOVERNMENT OWN SOURCE, 1980 AND 1995 (AS A PERCENTAGE OF TOTAL REVENUE)

FIGURE 2.2 LOCAL GOVERNMENT OWN SOURCE AND TOTAL REVENUE, 1995 (AS A PERCENTAGE OF GDP)

SOURCE OECD Revenue Statistics (selected years).

SOURCE OECD Revenue Statistics (various years). NOTE Japan’s ‘total revenue’ is a missing value in the OECD data but see discussion on Japan in this chapter.

these countries are leaders in NPM reforms. It can therefore be arguedthat low levels of autonomy, combined with country-specific externalities,work in favour of reform. In The Netherlands, it was severe economicrecession in the 1980s (together with economic doctrine) that drove themomentum for change both nationally and locally. The UnitedKingdom’s reforms, also public sector wide, were driven largely by polit-ical ideology. Even under New Labour the reform program has been noless doctrinal or pervasive, except that the current government apparent-ly has no objection to the public sector per se. In both Germany and theUnited States, reform has been driven by local entrepreneurial managerswhose perceptions of their local governments as rigid, inefficient andunresponsive lead to change. In the United States, however, NPMreforms began much earlier and have consistently been promoted by thefederal government with special purpose grants, technical guidance andthe like.

Canada and Spain are the notable exceptions to the pattern whererelatively low levels of autonomy have not resulted in the embrace ofNPM style reform. It is probable that in Canada’s case, the reformemphasis on amalgamations (imposed by provincial governments) hasprovided a substitute or alternative reform path. Spain’s fiscal dependen-cy is a new phenomenon (in 1980 Spain had a high level of autonomy),brought on by the introduction of a multi-level system of governmentand a corresponding increase in central government funding.

The inverse of the argument, that high fiscal autonomy will equatewith low NPM development, is not, however, supported by the data. InAustralia, New Zealand and Sweden (and to a lesser extent Switzerland),high fiscal autonomy coexists with an active program of reform. The dif-ference between the Anglo and Continental countries in this group isthat the latter were, for the most part, grass roots initiatives in responseto, in Sweden’s case, economic crisis and fiscal stress in the municipali-ties, and in Switzerland by entrepreneurial local managers keen to free uprigidities in the system. By contrast, Australian and New Zealand reformswere driven from the centre, in New Zealand, by an economic doctrinewhich was systematic in its application both nationally and locally. InAustralia, the NPM reforms were top-down and public sector wide, butmediated by a federal system that allowed for considerable variation. LikeSweden, an economic crisis in New Zealand was the critical influencingfactor. The Australian reforms are better characterised as being influ-enced by policy fashion at the national level (e.g. national competitionpolicy), and a combination of concerns at state level (see Chapter 7).


To summarise, looking across the spectrum from low to high localgovernment autonomy, the picture presents one of extremes, that is, itis in countries whose local governments have either high or low levelsof autonomy where NPM has been most keenly developed.

The trend in fiscal autonomy in OECD countries from 1980 to1995 is predominantly one of improvement. Of the sixteen countriesrepresented in Table 2.2, five lost ground but only two, the UnitedKingdom and Spain, are of any real import. As described above, theSpanish data presents a somewhat distorted picture resulting from theintroduction of regional-level governance. In the United Kingdom,central government take-over of the business tax and forced privatisa-tions of local enterprises during the period of the reforms explain thiscountry’s dramatic fall in local fiscal autonomy. Norway, Germany andSwitzerland experienced a slight decline in autonomy over the period,but with the exception of the United Kingdom, perhaps not a lot canbe read into the trend data for these countries. There is the possibilitythat a weakened fiscal position may have made them more vulnerable todirections from central government to reform. Certainly evidencedrawn from the case studies would support this notion. Even inGermany’s case where reform was initiated at the grass roots, pressurefrom above is evident in the literature (Wollmann 2002). On the otherhand, many countries with high to medium NPM development show astrengthening of their fiscal autonomy. This may be a direct result of thereforms and/or including the introduction or extension of user-paysservices. Certainly, the dominant trend indicates there was concern inmany countries at the start of the 1980s about the status of local gov-ernment and the need to reform.

Simple measures of fiscality are perhaps limited in explainingreform variation. The type and mix of taxes used, and the degree offreedom a local government has to decide the base and rate of the taxare important factors which may need further clarification before anyreal claims can be made about autonomy. The Anglo countries, forexample, rely heavily for their revenue on property taxes and experi-ence, at times, quite severe, rate capping by central governments.The Continental countries rely primarily on income tax (with theexception of The Netherlands whose main tax is also from property),which has the advantage of being elastic and progressive, except intimes of high unemployment (as was the case in Sweden during thereform period), when it can have severe impacts on local governmentrevenue.


TABLE 2.2 NPM DEVELOPMENT BY COUNTRY BY FISCAL AUTONOMY BY CHANGE 1980–1995

C O N C L U S I O N

This chapter has not attempted to evaluate whether the aims of thereformers have been achieved in countries where New PublicManagement has been developed. There is evidence, especially as NPMreforms have been implemented at the national level, that there have beennumerous unintended consequences, paradoxes, contradictions and thelike (Christensen and Laegrid 2001). Increasingly, evidence from the localgovernment reform experience has revealed similar problems of inconsis-tency (the reversal of CCT policy in Britain and Victoria is one example).


NOTE The numbers in parentheses in column 3 ‘Fiscal Autonomy’ refer back to the OECD qualifications of taxautonomy in the earlier part of the chapter. In Germany and France, tax autonomy varies between types ofauthority and explains two separate values. This data was not available for all OECD countries, includingAustralia and North America.


On the other hand, these problems do not appear to have diminishedNPM’s appeal as a solution to making governments more transparent,client oriented, and generally more efficient in their operations. In anenvironment of resource constraints the reforms have had a particularappeal for local governments. We should remember that NPM is justanother wave of reform, albeit a very profound one. Those elementswhich are likely to endure are ones that are successfully welded ontoprevious reform effort. Administrative reform is a dynamic process andnew ideas of a post-managerial nature have already begun to emerge,for example ideas of ‘new governance’, voluntarism and the like.

The chapter has attempted to put NPM reforms as they haveoccurred in Australia, in a global context. To do so, however, requiredan analytical framework that sets some benchmarks against whichcountries could be measured. Fiscal autonomy was the one chosen forthis exercise. A somewhat mixed pattern has emerged to explain theuptake of NPM cross-nationally in these terms. The proposition wasput that countries which have low levels of autonomy would be morelikely to be leaders in NPM reform. This was found to be generallytrue, with the exception of Canada’s local government, which has fol-lowed an alternative path to reform. The inverse proposition thatcountries whose local government sectors have high fiscal autonomywould be ‘laggards’ in NPM reforms was found generally not to betrue. Countries with high fiscal autonomy (including Australia) werealso found to be leaders in NPM reforms. However, with the excep-tion of Sweden, the initiators of reform in these countries have beencentral governments. The ‘leaders’ in NPM reform thus measure bothhigh and low on fiscal autonomy, in other words, it is a pattern ofextremes.

The chapter raised a number of methodological problems associ-ated with cross-country comparisons. How fiscal autonomy is mea-sured was raised as an issue requiring further research andclarification. For example, the absence of data using more sophisticat-ed measures such as levels of tax autonomy will be a problem forfuture research. It may be the case that other dimensions of autono-my, such as constitutional autonomy, need also to be taken intoaccount. The context in which administrative reform takes place iscritical too, especially the intergovernmental environment and its var-ious dimensions (two which emerged in this chapter are resource con-straints, and whether central governments can direct localgovernments to reform their administrations). Work would need to be

done to develop ways in which these more qualitative considerationsmight be usefully measured. Better data is certainly called for if a mul-tidimensional picture of local government reform trends international-ly is to be more fully explained.

ENDNOTES1 The transition to NPM has been described as a ‘paradigm shift’ from public

administration and its traditional doctrines to public management which relieson notions of public choice and individualism (Ingraham 1996).

2 Alternative descriptors perhaps more appropriate for local government are ‘bea-cons’ and ‘coasters’. This terminology was adopted by the United KingdomNational Audit Office to describe variation in development of NPM within theUnited Kingdom local government system. ‘Leaders’ and ‘laggards’ is used byHood (1996) to describe national governments but is also derived from NAOusage.

3 Swedish local government has a constitutional right to set tax rates.4 The German variant of NPM was called ‘New Steering Model’ or NSM.5 Indeed, an extremely influential book, Osborne and Gaibler’s Reinventing

Government (1991), which is often attributed with starting the NPM revolu-tion, gives most attention to individual local government reform initiatives.

6 Of the Nordic countries, Denmark is higher up the NPM scale than eitherNorway or Finland but not as high as Sweden (Kleven et al. 2000).

7 Italy and Japan are missing from Figure 2.1 because of unavailable data for thiscategory in the Revenue Statistics.

8 For a broader discussion on fiscal variation between OECD member states’local governments see Caulfield 2002.


PA R T B F I N A N C E

Local authorities, through the services they provide, impinge directly orindirectly on the lives of most of their citizens, whether by setting hous-ing standards, providing water, disposing of effluent and garbage, ormaintaining roads. Local government plays a key role in delivering theseand many other services.

Australian local government is currently under financial pressurefrom all sides. Councils are facing increased expectations from theircommunities to deliver more services, including those beyond the tra-ditional focus of local government. State and federal governments’expectations of local government have also never been greater, withmunicipal authorities being used increasingly to implement the policyobjectives of these higher tiers of government. At the same time ascouncils are confronting these increased expectations, they are findingthat they have limited means of raising sufficient income to meet thehigher expectations.

Community expectations of local government are increasing at analarming rate while at the same time councils are battling with increasedcosts and restrictions over their revenue-raising ability. This has result-ed in a ‘gap’ between the community’s expectations of municipalauthorities and the amount of funds available to meet these expecta-tions, which we may call ‘the community expectation/funding gap’.

This chapter seeks to outline the economic dilemma confrontingcontemporary Australian municipal government by considering howlocal government can use its limited resources to meet the relativelyunlimited demands of the public it serves. The objective of this chapteris thus to discuss some of the financial pressures facing local govern-

3

F I N A N C I N G L O C A L G O V E R N M E N T I N A U S T R A L I A

Andrew Johnson

ments in Australia and how they may best be overcome. It is not theintention of this chapter to debate the merits or otherwise of theseincreased public expectations, but rather to focus on the limitedresources available to councils and the restrictions that they face inattempting to meet these expectations.

The chapter itself is divided into five parts. The first considers thenature of the financial problems facing contemporary local governmentin Australia; in particular, their aging infrastructure and increased com-munity expectations. The second discusses some of the constraints fac-ing local government, including the devolution of responsibility,‘raising the bar’, cost shifting, increased community expectations andvarious other problems within the sector. Part three provides anoverview of the Commonwealth Financial Assistance Grant and its rolein funding the operations of local government while part four puts for-ward some recommendations for managing the funding situation facinglocal government. Some brief conclusions are then drawn in the finalsection.

T H E N A T U R E O F T H E P R O B L E M

The nature of the problem facing local government is analogous to thebasic economic dilemma confronting society: That is, how can localgovernment reconcile the difference between the unlimited wants ordemands that are placed on it by the community and other levels ofgovernments, and the limited resources that it has available to meetthese unlimited demands. The position of local government, as we willsee below, is further complicated by its limited and restrictive revenue-raising options and the increase in the magnitude of costs that are‘passed down’ to local government (from the higher tiers of govern-ment) without matching (or indeed any) corresponding revenue.

In essence, local government is currently facing strong financialpressures in which it is unable to meet the increasing needs of the com-munity it serves as well as controlling large amounts of infrastructurethat will need replacing or renewing in the near future. Thus the gapbetween what the community and other levels of government demandfrom councils, together with councils’ assets renewal requirements,when compared to the funds that local government has to meet thesedemand, is growing at an alarming rate.

A significant proportion of council-controlled infrastructure wasconstructed by local government during the post-World War II era fromgrants provided by state and federal governments. Very little of this infra-

3 8 • F I N A N C E

structure was developed from council-generated funds. At present manyof these assets are in poor condition and require replacement from coun-cils’ existing revenue stream, including swimming pools, bridges, halls,roads, etc. However, local government does not have the financial capac-ity to replace these assets or bring them up to a satisfactory standard,without the sustained assistance of state and federal governments.

There are a number of studies available that seek to quantify the costof renewing council assets. For instance, a 1998 Victorian governmentreport titled Facing the Renewal Challenge, which considered currentreplacement cost and long-term consumption of roads, bridges, foot-paths, drains, parks, recreation facilities and public buildings, estimatedthat there was an annual infrastructure deficit, on these assets, of $233million per year. This situation is highlighted in Figure 3.1, whichshows the current and anticipated expenditure on asset renewal, theamount that councils can actually fund, and the resultant funding gap.

FIGURE 3.1 VICTORIAN COUNCILS ASSET RENEWAL EXPENDITURE PROFILE

F I N A N C I N G L O C A L G O V E R N M E N T I N A U S T R A L I A • 3 9

SOURCE Adapted from AMQ Int. Dec 1998, p.9, Figure 1.1.

In a similar vein, another report, commissioned by the SouthAustralia Local Government Infrastructure Management Group in2001, entitled A Wealth of Opportunity, indicated that South Australiancouncils’ infrastructure maintenance was being under-funded by $105million (or 19 per cent of revenue). The report found that the situationwas far worse for rural councils, which needed to quadruple their cur-rent expenditure on infrastructure maintenance. These councils cur-rently spend less than $20 million a year on asset maintenance, butrequire some $64 million to be sustainable in the long term. In muchthe same way, in 1999–2000 Western Australian councils recorded aroad infrastructure deficit of $59.8 million per year.

Community expectations of local government are also increasing atan exponential rate. Communities are increasingly looking towards localgovernment to meet their expectations of government, even in areasthat councils have traditionally not tackled. This may be a result of awidespread view that local government is the best vehicle to implementcommunity requirements and the most accessible form of governmentfor the community to be able to provide direct input into the servicesprovided, and enable them to have more of a ‘say’ in how things are runin their area. It may also be a result of the centralisation policies of moststate and federal government agencies that have seen many public agen-cies leave rural regions for consolidation in metropolitan areas.

Local government is in the unique position of being located in over720 communities throughout Australia. It is the level of governmentthat is the ‘closest to the people’; it is most directly influenced by, andhas the most interaction with, its constituents. Due to the centralisationof most state and federal agencies, these higher levels of governmenthave regarded councils as the most efficacious vehicle for implementingtheir policies, particularly when they require ‘on the ground’ imple-mentation. In particular, there has been a myriad of legislation derivingfrom state and federal parliaments which local government has beenrequired to implement on behalf of these governments, usually with noadditional finances being provided to assist councils.

Local government is struggling to fund its basic services, let aloneimplement the policies of other levels of government and is increasing-ly examining cost reduction measures. The questions that should beasked are: Why is local government facing this problem? How did thissituation arise? These and other questions will be considered in the nextsection.

4 0 • F I N A N C E

T H E G E N E S I S O F T H E P R O B L E M

In broad terms, there are four main reasons for the current financialdilemma of Australian local government. As outlined by theCommonwealth Grants Commission (CGC 2001, pp.52–53) they are:

• Devolution — where a higher sphere of government gives local govern-

ment responsibility for new functions;

• ‘Raising the Bar’ — where higher tier of government, through legislative

or other changes, increases the complexity of, or standard at which, local

government services must be provided, and hence increases the cost;

• Cost Shifting — characterised by two types of intergovernmental conduct.

Firstly, where local government agrees to provide a service on behalf of

another sphere of government, but funding is subsequently reduced or

stopped, and local government is thereafter unable to withdraw from ser-

vice provision because of community demand for the service. Secondly,

where some other sphere of government ceases to provide a service and

local government is obliged to take over; and finally

• Increased Community Expectations — where the community demands

improvements in existing local government services.

In addition to these imposed problems, local governments them-selves are also partly responsible for their own plight. A majority ofcouncils are perceived to be inefficient, they often lack scale in theiroperations, a large number have deteriorated into an extremely poorfinancial position, and strategic and long-term planning is generallylacking. A number of councils are also reluctant to set their rates andother charges at realistic and sustainable levels.

Public services need to be delivered at the most appropriate level ofgovernment, taking into account the scale of operations and the differ-ential level of services required by specific circumstances. In many caseslocal government is the most appropriate body to implement these ser-vices. However, in most situations, the service (and its cost) is shiftedfrom other levels of government onto local authorities, without any cor-responding transfer of income to provide the required service. To over-come these additional costs, local government has tended to initiallyreduce reserve funds, then decrease the amount of infrastructure main-tenance, and finally diminish the services that they provide. In general,there tends to be little scope to maintain existing service levels, let aloneprovide further services in order to meet expanding community needs.


‘ RA IS ING THE B AR ’ AND DEVOLUT ION OF RESPONS IB I L IT I ES

We have argued that state and federal governments are increasinglyusing local government as a vehicle for implementing their own policiesand political objectives. This is typically achieved by introducing newlegislation and/or regulations that local government is required toimplement on behalf of the higher tiers of government, or where therequirements of existing legislation, which local government adminis-ters, are changed to provide for more strenuous compliance. In bothcases, the costs associated with the increased legislation are usually metfrom existing council revenue.

By way of example, Table 3.1 provides a summary of the expandedrole that councils are being asked to play in meeting the requirementsof various acts and regulations in New South Wales. In most cases, noadditional funds have been provided.

From this example, it seems clear that state agencies are continuingto respond to pressures on their own resources, and to communitydemands for action on issues of concern, by devolving responsibilities tolocal government. This is a worldwide phenomenon at a time when cen-tral governments are seeking to do ‘more with less’ (LGSA 2001, p.10).

What steps can be taken to remedy this increasingly untenable stateof affairs? It can be argued that in a society in which public account-ability of elected representatives is paramount, all bills introduced intoparliament should, prior to being introduced, be required to have amandatory cost and benefit analysis prepared as part of the Bill. Thecost and benefit analysis should be made available for public comment.At least the following issues should be addressed:

The costs involved in implementing the requirements of the Bill(once off and recurrent costs); responsibility assigned for meeting thecosts associated with the Bill; identification of the beneficiaries of theBill; and an estimate of the magnitude of the benefit of the Bill. A costand benefit analysis along these lines should improve the accountabilityand transparency of proposed policies and lead to better decision-mak-ing. It would enable the community to appreciate the ‘true’ cost of leg-islation as well as the incidence of the burden of these costs and benefits.

COST SH IFT ING

In principle, cost shifting can take a number of different forms. In thefirst place, a higher tier of government can provide local governmentwith grants to undertake a new function. Over time, through lack ofadequate indexation of the grant, municipalities receive reduced grant

4 2 • F I N A N C E


TABLE 3.1 RECENT ADDITIONAL IMPOST ON NSW LOCAL GOVERNMENT

SOURCE LGSA Jan 2001, p.15.

funding in real terms, thus forcing councils to use their own revenueto allow them to continue to provide the service in question. Secondly,councils have been obliged to provide a service which would normallybe offered by a higher tier of government (such as law and order orhealth services), but where that higher tier is either reluctant or unwill-ing to provide the required service. The final situation involving costshifting occurs where government agencies, facing financial pressures,seek to recover an increasing array of fees, charges, licence contribu-tions and other monies from councils in order to fund the agency’soperations.

COST SH IFT ING IN GRANT INCOME

Councils receive around 13 per cent of their income from currentgrants and subsidies as well as a substantial amount of grant funding forcapital projects. Grant funding thus forms a significant proportion ofthe total income of municipal authorities and is accordingly critical totheir ability to provide a number of services.

Figure 3.2 indicates that since the introduction of CommonwealthFinancial Assistance Grants to local government in 1974–75, Australianlocal government revenue from all sources has grown by around 10 percent per annum. More specifically, the revenue from user charges hasgrown most rapidly (13 per cent per annum), followed by other revenue(11 per cent), financial assistance grants (10.8 per cent), municipal rates(9.4 per cent), and (with the least growth) revenue received from thestate government (6.6 per cent).

These trends indicate that there has been a greater reliance on usercharges and other income to fill the gap left by reduced grant fundingand, to a lesser extent, reduced dependence on rate income.

A common characteristic of most grants is their lack of adequateindexation. In cases where indexation is applicable, the method ofindexation used has tended to bear little relationship to the increase inthe cost of providing the actual service. Table 3.2 serves as a salientexample of the problem.

Table 3.2 indicates that out of the forty-eight categories of specialgrants received by Victorian local government, only sewage andaged/disabled housing grants have increased as a proportion of coun-cils’ expenditure. This trend points towards a general decrease on thecost coverage of grants, which have been provided to municipal author-ities to enable them to perform specific functions on behalf of the grant-ing body. The reduced cost coverage of the grants generally results in

4 4 • F I N A N C E

the municipalities being required to fund more of the service from theirgeneral revenue, thus leaving fewer funds available to meet other legit-imate community expectations. This represents a cost shift from thegranting body (usually the state government) to local government.

The reduction in cost coverage of grants illustrated in Table 3.2 isnot a result of increased costs of councils in providing the service, butrather a reduction in grant funding provided in real terms.

The special purpose grant funding to Victorian local governmenthas fallen substantially in real terms from 1995–96 to 1999–2000, withover half the functions experiencing double-digit declines. This situa-tion is common to local government across Australia. Moreover, thesereductions in grants have not led to a commensurate reduction inexpenses for these functions. [Victorian] councils’ expenditure forlibraries fell from $99.6 million to $97.8 million and childcare fell from$146.0 million to $135.6 million in the same years (MAV 2001, p.12).

Successive [Victorian] state governments have not demonstrated apenchant for maintaining equity in the distribution of specific purposeprograms where local government is a major recipient and serviceprovider. State government funding programs affecting local government


FIGURE 3.2 LOCAL GOVERNMENT REVENUE SOURCES 1974–75 TO 1997–98

SOURCE Adapted from Commonwealth Grants Commission June 2001, p.51.

TABLE 3.2 VICTORIAN SPECIAL PURPOSE GRANTS AS PERCENTAGE OF EXPENDITURE (EX DEPRECIATION)

4 6 • F I N A N C E

have been characterised by a lack of transparency concerning either orboth the quantum of funding and the relative levels of funding provid-ed to various recipients (MAV 2001, p.3). Perhaps more importantly,they have been marked by a lack of indexation. While the state govern-ment has, over recent years, revamped its funding approaches (such asfrom grants to output-based purchasing), it has nevertheless been loathto explicitly introduce indexation into funding formulae. It is difficultto comprehend a situation in which a state government would passive-ly accept similar treatment from the Commonwealth regarding trans-parency and indexation (MAV 2001, p.3).


SOURCE Municipal Association of Victoria (MAV) May 2001, p.13.

4 8 • F I N A N C E

As a result, the funding position of local government has been erod-ed by both reductions in the real value of grants and subsidies and anunequal sharing of any growth funding between funding recipients.This deterioration of the local government funding position hasoccurred across the range of programs from ‘Home and CommunityCare’ (HACC) to ‘Beach Cleaning’. There appears to be an expectationthat local government has the capacity to absorb these effects (MAV2001, p.3).

COST SH IFT ING IN EXPENDITURE

We have argued that state agencies are continuing to respond to pres-sures on their own resources, and to community demands for action onissues of concern, by devolving responsibilities to local government andincreasing fees and contributions payable by local government. Thisseems to be a ‘solution’ to the agency’s dilemma and has the addition-al advantage of having relatively low ‘voter backlash’, since citizens areonly paying indirectly for the increases in the fees and charges.

Australian local government is also faced with increased expecta-tions on it to perform functions that are traditionally undertaken byother tiers of government. This seems to have been caused by the with-drawal and centralisation of most state and federal services.

One rural council in northern NSW contends that cost shiftingaccounts for some 26 per cent of their rate income. In their submissionto the Commonwealth’s Inquiry into local government and cost shift-ing, they provided the following examples of cost shifting (Guyra ShireCouncil 2002, pp.6–9).

Provision of doctors: Health care is generally considered the respon-sibility of the state and federal governments. However, rural local gov-ernment is now being asked, at their own expense, to find medicaldoctors for their community;

State government fees and charges: Fees in this category includeEPA load base licensing for sewer schemes, general increase in EPAlicences, amounts payable to the state under the Companion AnimalsAct, contribution to the NSW Fire Brigade (in addition to amount paidto the Rural Fire Service which has doubled in four years), increases inregistration costs for heavy vehicles and amounts payable for lease feesas a result of council ‘beautifying’ unsightly land owned by Rail Estate;

Community safety and policing: Local government is being askedby the state government to set up committees to act as a communica-tions channel between residents and the NSW Police Force, a task

historically assigned to police officers. Further, the State AttorneyGeneral’s Department offers grants to specific communities to over-come some law and order issues, provided that the council prepares acommunity safety plan for their area; and

Pensioner concessions: In NSW, councils themselves have to makeup around 45 per cent of this ‘welfare’ payment. If pensioner conces-sions are a legislated welfare entitlement to assist the aged, then that tierof government responsible for welfare payments should meet the cost.The Commonwealth government is saving $59m annually from its wel-fare budget in NSW alone by having local government absorb thesewelfare payments (based on pensioner rebates made during 2000–01:see DLG 2001, p.137).

COMMUNITY EXPECTAT IONS

The public appears to want the municipal authorities to provide more‘services to the person’ and be involved in services that depart from thetraditional ‘services to the property’ focus of Australian local govern-ment. This is reflected in Table 3.3, which provides details of the chang-ing spending patterns of local government over the past twenty years.Table 3.3 shows that expenditure by councils in the area of social ser-vices, sanitation and protection of environment, and recreation and cul-tural services has increased significantly as a proportion of councils’ totalexpenditure. This increase in expenditure has come at the expense ofspending less, as a proportion of total expenditure, on fuel and energy(most of these functions have been transferred to state-run agencies),transport and communication, and public debt.

These figures confirm that there has been a general trend away from‘services to the property’ and more involvement in ‘services to the per-son’, together with a greater focus on environmental issues, as a per-centage of local government total budget.

The Commonwealths Grant Commission’s (2001, p.53) analysis oflocal government expenditure over the period 1961–62 to 1997–98appears to support this view. An examination of the expenditure dataembodied in Figure 3.3 indicates that the following trends are evident: • A move away from property-based services to human services.

• A decline in the relative importance of road expenditure (although itremains the largest function, its level of importance has declined fromabout half of total expenditure in the 1960s to a little more than a quarterin the 1990s). Councils have tended to defer road expenditure rather thanreduce human services.


• An increase in the relative importance of recreation and culture, and hous-ing and community amenities (these are now a large area of local govern-ment expenditure, each approaching 20 per cent of total).

• An expansion of education, health, welfare and public safety services(which has increased from 4 per cent of total expenditure in 1977–78 toabout 12 per cent in 1997–98).

Local government was originally set up to provide ‘services to theproperty’ with the higher levels of government being responsible for theprovision of ‘services to the person’. Much has changed since manylocal authorities were constituted. Amongst other things, it seems thatcontemporary communities expect a great deal more from their munic-ipality than simply the traditional provision of ‘services to the property’.Indeed, it appears that many communities expect the local authority to

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TABLE 3.3 CHANGE IN COUNCILS EXPENDITURE (AUSTRALIA WIDE) 1977–78 TO 1997–98

SOURCE ABS Year Book 2000, p.711 and 1980, p.629.

be involved in the provision of social services or ‘services to the person’.It may be possible to explain the genesis of this change on fairly obvi-

ous socioeconomic grounds. For instance, Adolph Wagner (1883) deter-mined, over a hundred years ago, that there was a positive correlationbetween the level of economic development and the proportion of publicexpenditure directed at public goods: the so-called ‘Wagner’s law’ holdsthat public expenditure increases at a faster rate than national output. Italso infers that as per capita income rises in advanced nations, so their pub-lic sector will grow in relative importance. This may explain heightenedpopular demands on Australian government, including local government.

PROBLEMS WITH IN THE SECTOR

Rate revenue is the single largest source of revenue for most Australianlocal governments, comprising approximately 37 per cent of total localgovernment revenue. Rate revenue is also the only source of taxationdirectly available to local government.

Local government, as a sector, has generally been reluctant to set itsrates at higher levels that would allow it to be more sustainable in thelong term. Elected municipal representatives have been under consider-


SOURCE Commonwealth Grants Commission June 2001, p.54.

FIGURE 3.3 COMPOSITION OF LOCAL GOVERNMENT EXPENDITURE 1961–62 TO 1997–98

able political pressure from voters to keep rate increases to a minimum.NSW local government has the added complication of rate pegging leg-islation that prevents councils from increasing their rates to a level thatwill provide them with the financial capacity to meet the increasedexpectations of the community as well as fund the replacement of theiraging infrastructure. It is also interesting to note that NSW local gov-ernment has not had the lowest increase in rates in Australia despitebeing subject to rate pegging legislation that is designed to removecouncils’ ability to set rates.

Ernst and Young (1990, p.8) in their report into NSW local gov-ernment rating argued that it has been possible for local government to‘make room’ for the state government through the rate peggingarrangements. However, they contended that the reluctance of the localgovernment sector to increase rates will (in the long term) provide agreater opportunity for the state government to exploit what has tradi-tionally been seen as a local government tax base. These argumentscould be applied equally across Australia.

This is illustrated in Table 3.4, which shows absolute volume offunds raised from property taxes by both state and local governmentsacross Australia. Table 3.4 also provides a comparison of the increase inproperty taxes across Australia by both tiers of government. These fig-ures indicate that the states have, on average, increased the percentageof land tax collected (in all but six of the last sixteen years) by more thanthe respective increases in local government rates.

While setting rates at a realistic and sustainable level to fund thedemands facing local government should be given a priority, it will notsolve the funding constraints faced by local government in its entirety.Nevertheless, it will greatly assist councils in reaching these goals. Forthis to be politically feasible, the community will need to be involved inthe setting of rates and determine if they are prepared to pay more fortheir increasing demands on local government.

Local government in contemporary Australia seems to be held insomewhat low esteem by both the general public and higher tiers ofgovernment. This is believed to be in part a result of local governmentbeing reluctant to promote itself and its achievements, leaving themedia to highlight only the ‘bad’ side of local government when someadverse event occurs.

Local government is always in the public eye as a result of the factthat most of its services are provided where the community can readilysee them. This has led to a situation, arising over many years, where the

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sector is perceived as being inefficient, wasteful, with staff lacking ade-quate skills and supervision, and decisions being made for political gain.In sum, it does not provide value for money and does not adequatelyconsult with its constituency.

These factors may have been partially true ten years ago, but are notaccurate of local government in the twenty-first century. Nonetheless,past community attitudes still prevail, and until this perception ischanged local government will have significant problems in building itscapacity. While these negative attitudes continue, the community will bereluctant to contribute more taxes for fear of wastefulness, and the stateand federal governments will be reluctant to provide greater autonomy,more revenue and greater powers to the sector.

Local government needs to ensure that its performance is at least with-in community expectations, reform those councils who bring disrepute tothe sector, promote its successes, and then seek to improve the perceptionsabout its operations. Local government must seek to improve its efficien-cy and generate savings that can be used to provide additional services.

C O M M O N W E A L T H F I N A N C I A L A S S I S T A N C E G R A N T S

The single largest grant received by local government is theCommonwealth’s financial assistant grant (FAG). The local governmentsector has received untied assistance from the Commonwealth for overa quarter of a century. When first introduced in 1974–75,Commonwealth funding to local government was an application-basedprogram. In 1976, income tax-sharing arrangements were introduced.In 1985–86, tax sharing was replaced with the level of funding beingcapped and only allowed to increase by 2 per cent more than inflationfor that year. Funding was then maintained in real terms through to1989–90 (Access Economics 2001, p.3).

Apart from a reduction in 1996–97 associated with a budgetary sav-ings exercise following a change in Commonwealth government, localgovernment FAGs have been maintained in real per capita terms sincethen, rising annually in line with an escalation factor taking into accountchanges in population as well as inflation, as determined annually by theCommonwealth Treasury (Access Economics 2001, p.3).

The ostensible objective of general-purpose financial assistance fromthe federal government to local government is to strengthen local gov-ernment to enable it to provide a wider range of services and to promoteequity between councils and certainty of funding (NOLG 2001, p.25).


5 4 • F I N A N C E

TABLE 3.4 STATE AND LOCAL GOVERNMENT REVENUE FROM LAND TAXES

SOURCE ABS Taxation Revenue Australia Cat No. 5506.0 1982–83 to 1999–2000.


The FAG is a general-purpose grant: thus local government can use itin the manner it sees fit and faces no restriction in spending the grant funds.The grant has two components, a general-purpose component and anidentified local roads component. In 2000–01 the general-purpose com-ponent amounted to some $920m and the identified local roads compo-nent equalled about $408m. Table 3.5 provides details of the magnitudeof the financial assistance grants received by councils since its inception.

The distribution of these funds to local government is determinedby the Local Government (Financial Assistance) Act 1995.

In formulating the distribution of grants to councils, the currentarrangements can be summarised as follows (NOLG 2001, pp.25–26):

• At the beginning of each financial year, the federal government determinesthe quantum of general purpose and local road grants estimated to beavailable for local government nationally. This is equal to the quantum ofthe grants received nationally in the previous financial year adjusted by anestimated escalation factor (the escalation factor should reflect changes inpopulation and the consumer price index);

• The estimated quantum of the general purpose and local roads grant foreach state is then calculated according to requirements of the federal legis-lation and these amounts are advised to states;

• Local government grant commissions in each state determine the alloca-tion of general purpose and local road grants among local governmentbodies in the state;

• The local government grants commission recommendations are then sentto the federal minister for approval;

• Once these grants have been approved by the federal minister, quarterly pay-ments are made by the federal government to the states and, without unduedelay, these are passed on to local government bodies as untied grants;

• Towards the end of the financial year, the escalation factor is revised andthe final quantum of the grants for the financial year is recalculated;

• An adjustment to the allocation to local government bodies is made andtheir payments in the following year are adjusted.

• The grant is distributed from the Commonwealth to the individual statelocal government grant commissions on a per capita basis. It is then up tothe individual state-run local government grant commission to determinethe method of dividing the grant between the local government bodies intheir state. The method must be approved by the federal government andhave regard to the following principles:

• Horizontal equalisation — Horizontal equalisation is achieved if eachcouncil in the state is able to provide the average range, level, and quality

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of services by reasonable effort, taking into account differences in thecapacity to raise revenue and in their expenditure needed to provide aver-age services (NOLG 2001, p.32)

• Effort neutrality — The grant is distributed without regard for the policiesof the individual councils.

• Minimum grant — Each Council must receive at least a minimum level ofthe general-purpose grant.

• Other grant support — Government grants (and all other revenue of thecouncil) are considered when determining the revenue raising capacity of acouncil, in order to ensure the grant is distributed according to the princi-ples of horizontal equalisation.

• The Aboriginal people and Torres Strait Islanders — The grant should reflectthe number of Aboriginal People and Torres Strait Islanders in the counciljurisdiction and the differences in the range of services required by this group.

• Identified road component — The national principles require that the roadcomponent of the FAG be distributed according to road expenditure needs,including consideration of factors such as length, type and use of roads.

Local government has long argued for the amount of funds receivedunder the government FAG to be increased. Based on the calculations ofthe NSW Local Government Grants Commission, the Commission onlyhas sufficient funds to distribute approximately 58 per cent of what theyhave determined that councils should require under their funding for-mula. At the same time, Figure 3.4 indicates that the grant has decreasedsubstantially as a portion of total Commonwealth taxation income.

This situation can be compared with the current arrangements inregard to the Commonwealth’s financial assistance ‘grant’ provided tothe state governments. Following the introduction of the goods and ser-vices tax on 1 July 2000, the Commonwealth agreed to provide thestates with the entire proceeds of this new tax in place of the current pay-ment. The Commonwealth also provided a guarantee to the states thatthey would be no worse off under the new arrangements and agreed toprovide additional funds to make up any shortfall in payments.

This left the states with greater financial independence since theydid not have to attend their annual ‘begging sessions’ (the Premier’sconference) to fight for their share of federal revenue. The GST alsoprovided the states with access to a growth tax that is considered fun-damental to the sustainability of governments. Local government lostthis opportunity for a share of this revenue and therefore access to agrowth tax. This would have provided additional autonomy by reduc-ing the reliance on another sphere of government for funding.


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TABLE 3.5 FAG PAYMENTS TO LOCAL GOVERNMENT

SOURCE NOLG 2001, p.44, Table 3.4.

M A N A G I N G T H E P R O B L E M

It can be argued that ameliorating the problem of increased financialpressures on local government involves a two-pronged solution. Thefirst step incorporates managing public expectations of local govern-ment, and the second step requires additional resources from bothinternal and external sources. This process will require cooperationbetween all parties concerned: local government, the private sector,other levels of government, and the public at large.

Local government must manage the voter’s expectations and workwith the constituents to determine what should be provided.Community involvement and education are considered to be a vital ele-ment in allowing councils to meet the expectation of its residents. Localgovernment should first educate the people in their operations and thechallenges they face, the expectation/funding gap, and then involve res-idents in the decision-making process of the council.

A society educated in the challenges facing local authorities andtheir communities would be more open to any proposed changes andwill also look favourably towards to any proposed price/rate rises in


SOURCE ALGA May 2001.

FIGURE 3.4 GROWTH IN TAXATION AND LOCAL GOVERNMENT ASSISTANCE 1986–87 TO 2003–04

order to tackle these challenges. Public education can assist with thereluctance to change, which is prevalent in most communities. It candemonstrate why change is necessary, the benefit of the proposed alter-ations to the status quo, and what would happen if the proposedchanges were not undertaken. In turn, local government should deter-mine the community’s needs, prioritise these needs, and work towardsclosing the expectation gap.

While all needs identified cannot be fulfilled immediately, given thecouncil’s limited resources and the possible short-term commitment ofexisting resources, it needs to consider planning to meet these needs inthe longer term. It is considered beneficial for local authorities to under-take forward/strategic planning to set about addressing the communi-ty’s needs and expectations and ultimately reducing the expectation gap.

We contend that the Management Plans of council should providedetails on public expectations, factors affecting council’s ability to meetthese expectations, why council does not (in the short term) intend tomeet some of these expectations, and what would be required in orderto meet any unfilled expectations. This may involve providing details ofthe costs involved to council in providing the service, together withfunding options. The funding options may include the amount of anappropriate user charge or what other services would need to be for-gone to fund the new service. Councils’ Management Plans and AnnualReports should also provide details on the condition of councils’ infra-structure and the councils’ infrastructure deficit. Council should alsoconsider reporting on how they intend to overcome the deficit andmeet the needs of the community.

It is also in the interests of local governments to spell out in theirManagement Plans and their Annual Reports the restrictions imposed ontheir revenues and expenditure (such as cost shifting, devolution, etc.) andto quantify the effect of these restrictions on their finances. Municipalauthorities should illustrate the effect of these restrictions by providing tan-gible details on what this reduced funding means to the community. Theseactions will assist in bringing to the public attention the problems and con-straints facing local government in meeting community expectations.

On its part, local government must make every effort to raise addi-tional funds to enable it to meet the increasing community needs. Theadditional funding should be found from all sources, including serviceusers, the community, internal efficiency gains, and from the state andfederal governments.

External funding will require that local government can demonstrate

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itself worthy of the additional finance. This will involve councils review-ing their operations to ensure that they are providing ‘best value’ intheir operations, continually looking for efficiency savings, and ensuringthat they are operating in an accountable and transparent manner.

Local government should also ensure that it is making the most ofthe limited resources it currently enjoys. It needs to determine that it isdelivering value for money to its community and that it is producingservices in the most efficient way possible. It should be noted that anaverage efficiency saving of 5 per cent annually throughout Australianlocal government would produce savings of $846 million each financialyear. This represents an appropriate incentive to review the current wayservices are provided and to look at new and innovative methods of pro-viding services. Councils ought to consider all service provision optionsand determine if services can be done better and embark on a continu-ous improvement program to ensure that they are operating efficientlyas possible considering its objectives.

One of the highest priorities of local authority surely resides inimproving its efficiency to be able to create savings that can be applied tothe provision of additional or better quality services. Local authoritiesshould be required to set efficiency improvement targets, define how theyintend to meet these targets, report the efficacy of achieving these targets,as well as how the savings generated from the efficiency gains have beenapplied (like increasing services or reducing fees). Councils cannot expectto manage the funding gap alone. Solving the expectation/funding gapwill involve a cooperative approach from the community, local govern-ment, the private sector and other levels of government. Municipal gov-ernments ought to consider all available external funding options toincrease the amount of expectations that they can meet. This includesseeking additional government funding, wider employment of usercharges, and the extensive use of the private sector in the provision of ser-vices and funds. Moreover, intergovernmental cooperation and partner-ships between the public and the private sectors are perceived to beessential if the pursuit of successful strategies in dealing with issues, suchas infrastructure management, sustainability, affordable housing andappropriate transport systems, are to be achieved (Sproats 2001, p.37).

The financial pressures being faced by councils are not due to any single dominant factor. It is therefore unlikely that a single responsewould be reasonable or appropriate (Commonwealths GrantCommissions 2001, p.55).

Where a source of financial pressure is a result of the discretionary


actions of the council itself (because the council has chosen to respondto particular needs of their residents), it would be appropriate for thecouncil to meet these pressures from their own revenue sources.

Where the source of the pressure is the result of changing policiesor actions of other spheres of government (the state or theCommonwealth), it would be appropriate for that sphere to acknowl-edge local government’s need for greater financial assistance.

Given that municipal authorities are the best placed to implementother governments’ policy, they must be suitably resourced (both withqualified staff and financially) to implement the policies.

The measures outlined above will assist municipal authorities inmeeting community expectations and ensure a more open, transparent,and accountable method of providing financial assistance to local gov-ernment. A more open, accountable, responsive and performance-ori-entated local government, which involves the community in itsdecision-making process, will be more inclined to gain the trust of otherlevels of government and its residents. This trust is required beforeeither of these parties will provide additional funding to local govern-ment. Put differently, unless the community and other governments seethat local government is providing the best value for the dollars theyprovide, they will not be prepared to provide more grant funding, orincrease contributions through higher user charges and taxation.

C O N C L U S I O N

Local government is far from perfect. Sometimes wrong decisions aretaken, inefficiencies are allowed to persist, customer service falls short ofthe standards required, and so on. Shortcomings are well documented:operating under legislation requiring highly transparent procedures andvigorous public perusal, local councils are subject to intense scrutiny.They are also liable to the pitfalls facing any democratic institution(LGSA 2001, p.27). Local government requires autonomy in its rev-enue raising activities in order to meet the needs of its community. Butthis autonomy must be balanced by improving accountability of localgovernment.

Community demands are likely to increase over time. People willalways strive to increase their quality of life, thus will always expectmore from governments. State and federal governments will also con-tinue to use local government as a vehicle to implement their own pol-icy objectives. The result of all of these factors is that councils shouldbe proactive and anticipate changing and heightened demands from

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their respective communities and be in a position to provide theseneeds as and when required.

The increased resources now required to meet these responsibilities,as a result of increased expectation from the states, are affecting localgovernments’ ability to provide other services to its community. Thecombination of increased resources required to implement the growinglegislative requirements of the state, and severe restrictions over localgovernments’ revenue-raising ability, has led to a reduction in servicesbeing provided in other areas. Few of the additional responsibilitiesconferred on local government over the past few decades have beenmatched by adequate, ongoing funding, or new sources of revenue(LGSA 2001, p.14).

Local government resources can only be stretched so far before acrisis point is reached. We are already seeing evidence of this with thedeterioration in local infrastructure, particularly roads, the runningdown of reserve funds, the lack of provisions being made for futureassets replacement, and a reduction in the provisions made for majormaintenance items. Local government is under considerable pressure tochange its traditional character and procedures in many ways. It facesthe prospect of financial cuts in both state and federal grants and isexpected to ‘do more with less’ by improving its managerial and eco-nomic efficiency (Self 1997, p.297).

Since the 1970s the Australian public sector has been under constantreview. Changes have occurred at all levels of government, and they fol-low international trends in other western democracies (Olson et al.1998). Financial reforms have been one aspect of the reform package.The financial reforms have emphasised the efficient and effective use ofresources, greater accountability for the outcomes of resource usage, andenhanced transparency of decision-making processes and operations(Bishop 1996; Parker and Guthrie 1993; Gray and Jenkins 1993).

The promotion of accrual reporting was the purported cornerstoneof these reforms, and during the 1990s local governments in Australiahave been primarily ‘busy’ implementing these techniques. However,since the techniques have become established, it is now timely for localgovernments to assess their external reporting mechanisms, particularlyin light of the unresolved accounting issues. This chapter looks at thecurrent state of external reporting in local governments in Australia andsuggests appropriate future refinements.

E X T E R N A L R E P O R T I N G

PUBL IC SECTOR REPORT ING FRAMEWORK

Since the early 1980s the public sector annual report has gained increas-ing prominence as the most comprehensive document that reports onthe achievements of Australian local government authorities. Regulatorshave tightened guidelines governing specific aspects of the production ofannual reports, particularly in relation to the content and timeliness ofreports. Historically, most Australian local government authorities have

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L O C A L G O V E R N M E N T F I N A N C I A L R E P O R T I N G

Christine Ryan

had poor records in terms of the timeliness of reports (Carnegie 1990).As a general rule, Australian local government authorities are currentlyrequired to produce an annual report within five months of the end ofthe financial year. However, as the focus falls on local governmentaccountability, pressure is exerted to decrease this five-month require-ment (see, for example, Queensland Public Accounts Committee 2001).

A significant component of the annual report is the annual auditedgeneral purpose financial statements. Local government regulators inthe various state and territory jurisdictions have the authority to setaccounting arrangements for the general purpose financial statementsfor the local authorities under their control. Parallel to this, theaccounting profession through its Australian Accounting StandardsBoard (AASB),1 issues accounting standards on particular issues or forspecific segments of business and the public sector. The accountingstandard pertaining to local governments, AAS 27 Financial Reportingby Governments, was introduced in 1990 for adoption by local gov-ernments in reporting periods ending after 30 June 1994.2 Most localgovernment regulators around Australia have mandated AAS 27 as thebasis for local government general purpose financial reporting. AAS 27recommends that local authorities report on an accrual accountingbasis, and that all assets be valued using a current cost value.

Accrual reporting was promoted as an essential tool for local gov-ernment authorities for a variety of reasons. However, one of the mainpurported advantages was that it would improve the poor levels offinancial management in many local government authorities. In otherwords, the introduction of accrual reporting was used as a mechanismto promote sound internal financial practices. Anecdotal evidence sug-gests this is not happening in many local government authorities, espe-cially smaller municipalities. The production of end of year financialreports is merely an accounting exercise and day-to-day management isstill done on the basis of cash information (see, for instance, LocalGovernment Association of Queensland 2002).

One of the major assumptions of the accounting regulators indrafting AAS 27 was that local government authorities have general-purpose users; that is, users who wish to know about the financialaffairs of the local government and who would not normally haveaccess to financial information. Moreover, the accounting regulatorsthen used the same framework to develop private and public sectoraccounting standards. However, the initial assumption that the infor-mation needs of users of general purpose financial reports (GPFRs)

L O C A L G O V E R N M E N T F I N A N C I A L R E P O R T I N G • 6 5

and the operating environments of organisations in both the privateand public sector were similar has recently been challenged (see forexample, Barton 1999a, English 1999; English and Guthrie 2000;Carnegie and Wolnizer 1995; Guthrie 1998; Walker 1989). Indeed, itcould be argued that many of the unresolved issues in local govern-ment financial reporting came about because of this assumption and anunwillingness of the PSASB to adequately explore the ‘unique’ cir-cumstances of the public sector (Walker 1989). Further, Walker (2001,2002) argues that in Australia, while there is limited demand for gen-eral purpose financial reports, which fail to meet even the most basicinformation needs of external readers of public sector financial reports,there is nevertheless a strong demand for performance information.Walker (2002, p.53) is critical of the efforts of Australian standard set-ters in this vein, arguing they pay only lip service to the importance ofperformance indicators, and provide little information on how agencieshave actually delivered services to the community. He argues furtherthat the accounting profession has ‘overstated its claims that sets offinancial statements unaccompanied by performance indicators willmeet the information need of external stakeholders’.

Compounding the problems imposed by the adoption of the privatesector financial reporting framework for the public sector is the aggra-vating factor that there has been no differentiation between the varioustypes of public sector agencies with respect to their financial reportingobligations. Local governments, government departments, statutorybodies, and government-owned corporations, irrespective of their sizeand geographic location, have all been considered to have stakeholderswith similar information preferences. It is argued by the opponents tothis ‘one size fits all’ approach that the consequence of this assumptioncan be felt in the continuing asset valuation problems that are apparentin the public sector. Barton (1999a, p.22) contends that a differentiat-ed approach is needed and the public sector environment is so highlyheterogeneous ‘that it cannot be treated as one for accounting purpos-es’. He maintains that the markets in which the services are provided arevery different. In particular, AAS 27 takes no account of the great dif-ferentiation in the size of local governments or in their geographic posi-tions. Numerous commentators have argued that the motivations andbehaviours of these municipal authorities might differ significantly,depending on these factors of size and location, and these differencesmay indicate the need for alternative accounting treatments (see, forexample, Kloot and Martin 2001, Mack et al. 2001; LGAQ 2002).

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While these arguments and empirical evidence are canvassed in theacademic literature, accounting regulators are currently reviewingwhether there is a need for a separate standard for local governmentauthorities. However, this review does not encompass the basic ‘appro-priateness’ of the premises underlying the standard or its provisions.Some practitioners in local government have argued that the imple-mentation of AAS 27 has been so successful that there is a debate aboutwhether a separate standard on local governments is still necessary (see,for instance, AASB 2002a). The argument proposed by those in favourof a repeal of AAS 27 is that the reporting elements are adequatelyaccomplished by the more general series of Accounting Standards. Atpresent, no final decision had been made, but the position put to theAASB by the Australian Council of Auditors-General was that AAS 27needed to be retained.3

Nevertheless, there are still two major unresolved issues which havethe capacity to impede one of the chief purported advantages of theintroduction of accrual information; namely, the comparability of infor-mation between different local authorities throughout Australia. Thefirst of these is the issue of the valuation of assets and the associateddepreciation of assets and the second is the issue of revenue recognition.

ASSET VALUAT ION

Assets in the private sector are usually classified as either current assets(those that will be converted into cash within the next year) or non-cur-rent assets (including intangible assets). In the public sector the mostcommon types of assets are current assets; non-current assets (such asbuildings and furniture); infrastructure assets (such as roads, bridges,and reticulation systems); heritage assets (such as galleries, museumsand other collections and heritage buildings); and community assets(such as monuments and parks, gardens and recreational reserves).4

Indeed, some scholars (see, for instance, Barton 1999a) would addenvironmental assets and many natural capital assets to this list. It isthese latter classes of assets (infrastructure assets, heritage assets andcommunity assets) that have been described as the ‘problem assets’ forthe public sector (McGregor 1999).

Three phases can be identified in asset valuation for local govern-ment.5 The first phase occurred prior to the introduction of AAS 27.There was no ‘uniform’ method of asset valuation. In fact, many assetswere not recorded at all. The second phase came when accrual account-ing began to be promoted, and the issue of the ‘appropriate’ value to


place on assets was raised. A current cost methodology was originallypromoted for local governments in the Exposure Draft to AAS 27.Assets were to be valued at written down current cost. As other sectorsof the public sector began to value assets (in particular the public trad-ing enterprises), a variant of CCA, so-called ‘deprival value’, was pro-moted and obtained widespread acceptance. ‘Deprival value’ is definedas the value that the owner would suffer if deprived of the asset. Thethird phase of asset valuation occurred in December 1999, with therelease of a new accounting standard — AAS 38 (Revaluation of Non-Current Assets). This essentially meant that all reporting entities had todecide whether to value assets on an historical cost basis or a fair valuebasis. Fair value is defined as the price that would be exchangedbetween a knowledgeable willing buyer and a knowledgeable willingseller in an arms-length transaction. Once the decision was made tovalue at fair value, then the entity could not move back to the cost basis.This essentially meant that the public sector would move its asset valu-ation from deprival value to fair value. Because of many requests frompublic sector entities for further guidance on measuring fair value, theBoard has decided to undertake a project to develop further guidanceon measuring an asset’s fair value. There is a three-year transitional peri-od for not-for-profit entities while the AASB conducts an investigationinto the relationship between fair value and current cost. During thistime, public sector entities can continue to use their existing revaluationbasis to measure non-current assets while the Board progresses the pro-ject (AAS 38, para.55).

Although the accounting standard setters have viewed public sectorasset valuation as a relatively straightforward and technical issue, theimplications of valuing assets are nonetheless vast and have recentlybeen highlighted in the literature. A central issue that needs to be con-sidered, which is at the heart of much of the discussion about asset val-uation in the public sector, is whether or not putting a value on theseassets serves any useful purpose. The two reasons most commonly advo-cated for valuing the assets of public sector entities are first, that unlessassets are valued they cannot be managed, and secondly, asset valuationis needed, so assets can be depreciated, and thus the full cost of servicesobtained. The proponents of accrual accounting argued consistentlythat its adoption would result in a better quality of information aboutthe operations and finances of the public sector, and in particular, itwould enable governments to know the ‘full’ cost (including the depre-ciation on assets) of the services provided.

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Depreciation of assets relies on the method of asset valuation. Anymove to a ‘current cost’ based methodology leads to increased depreci-ation charges, which has a material impact on the cost of governmentservices.6 Carlin (2000) and Walker et al. (2000) argue that the use ofa current cost methodology in the public sector was ‘ideologicallybased’. The methodology was advocated in the specific public sectoraccounting standards and promulgated by the regulators in bothTreasuries and Departments of Local Government. These writers haveargued that this methodology has no empirical basis, since there are fewstudies that examine the usefulness of current cost or replacement costdata in a public-sector context (but see, for example, Van Daniker andKwiatkowski 1986). However, the implications of using a current costmethodology are dramatic. Depreciation costs based on current costvaluations are higher than depreciation based on historical-cost valua-tions. Consequently, the cost of public services rises because of depreci-ation based on current cost, and any cost comparisons with the privatesector, especially in the instance of competition through outsourcing,will accordingly make the public sector seem inefficient (Carlin 2000;Walker et al. 2000). They argue that contracting out decisions andstatements about the perceived efficiency of the public sector may thusbe made on erroneous grounds.

While some commentators have highlighted the unintended conse-quences of asset valuation, others have contended that some public sec-tor assets are ‘unique’, and hence financial valuations should not beattempted. In general, they argue that in the private sector financial val-ues are placed on assets to enable their good management. However, inthe public sector, financial valuation of these ‘unique’ assets is not oftenpossible, and even where it is possible, valuation is not necessary to thegood management of the assets. They recommend the reporting ofthese assets separately outside the financial statements: thus treatingthem as ‘stewardship assets’, ‘trust assets’ or ‘facilities’ rather than assetsreported on the Statement of Financial Position (see, for example,Pallot 1990, 1992; Barton 1999a, 1999b; Mautz 1988).

There are two specific asset groups that are currently at the heart ofthe public sector asset valuation debate — the value of heritage andcommunity assets and the value to be placed on land under roads.

Barton (2000) argues that ‘community assets’ should not beaccounted for in the general-purpose reports of government agencies.Moreover, a financial value should not be placed on them. He bases hisposition on the fact that these assets are maintained by the government


for social purposes rather than for purposes of public administration orincome generation; they are not to be sold; they are open to the publicfor enjoyment; their benefits flow to public users rather than the man-aging entity; and they are to be maintained in good condition in per-petuity for the enjoyment of current and future generations because oftheir special and appreciated attributes. As such, they should not beincluded in a general-purpose statement of financial position of themanaging entity, but rather be reported separately for management andaccountability purposes.

Carnegie and Wolnizer (1995, 1996, 1997, 1999) make similarassertions in the context of publicly held collections such as those heldby art galleries. These authors recognise the need for the managers ofsuch collections to be accountable for the physical safekeeping, properuse, effective display, efficient and proper expenditure. However, theyargue that there are more effective ways of holding managers account-able than the application of financial values and accrual accounting tech-niques to assets which are primarily important because of their cultural,heritage, scientific and educative qualities. Carnegie and Wolnizer(1999) maintain that these qualities cannot be quantified in financialterms. They thus endorse the practice in both the United States andCanada where collections are not valued. They argue there ‘are moreeffective, sensible and intelligible measures of accountability … than theassigning of spurious and interpretable financial values to collections’(p.20). Pallot (1990) extends this argument by adding that in manycases in relation to these assets, managers cannot dispose of them andso should not be held accountable for what they do not control.

The valuation of ‘land under roads’ has also been beset by contro-versy. ‘Land under roads’ refers to land under roadways and roadreserves, including land under footpaths, nature strips and median strips(para.12). When AAS 27 was originally issued it assumed that all assetswould be valued. As local government authorities began to implementthe standard, the valuation of land under roads became controversialwith most local authorities opposing it. Not only was the legal questionof the controlling of roads uncertain, but also how the valuation was tooccur (Barton 1999c). The issue is an important one, because in thoseauthorities that have implemented the valuation, land under roads dom-inates their assets (Rowles et al. 1998). Consequently, if the financialstatements are being used for economic decision-making, then resolu-tion of this issue is of paramount importance. Until 2002, the Boardissued transitional arrangements that held that local government

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authorities had the option of not valuing land under roads until furtherresearch had been completed by the Board. The AASB at its February2002 meeting ‘tentatively’ decided that in respect of local governmentauthorities the option of not valuing land under roads should beextended indefinitely (AASB 2002b). The continuing controversy sur-rounding this issue and the variation in practice seems to undermineone of the purported advantages of accrual reporting; namely, enhanc-ing the financial comparability of authorities.

While the issue of asset valuation has proved contentious, so toohave the associated issues of the concept of depreciation, what is an ade-quate depreciation charge in relation to long lived assets, and therecording and treatment of maintenance expenditure. We will nowexamine these questions.

DEPREC IAT ION AND MAINTENANCE OF ASSETS

The concept of depreciation as it is currently understood in the account-ing profession means that the cost of the asset is allocated over its usefullife in recognition of the decline in service potential of the asset due toits continued use. This depreciation concept means that there is an inher-ent assumption that the life of the asset is not indefinite. The charging ofdepreciation does not cover the maintenance requirement to keep theasset in its normal condition. Thus, in addition to the charging of depre-ciation, any maintenance expenditure should be charged as an expense ofthe period in which it is incurred. However, any expenditure to increasethe service potential of an asset is a ‘capital expenditure’ and should beadded to the asset value. In relation to local government authorities,there was some resistance to providing depreciation in this manner,specifically for long-lived assets. It came from a number of quarters —those who had been using and recommending renewals accounting andthose recommending condition-based depreciation.

Under a cash accounting system, the concept of depreciation is notan essential element. However, even under a cash accounting system,there was still the recognition that long-lived assets did require mainte-nance to operate at their peak capacity. One such method that had somelong acceptance in relation to the accounting for infrastructure was thatof ‘renewals’. Renewals accounting identifies an entire network or sys-tem as an asset and recognises that these assets must be maintainedindefinitely. The concept of renewals accounting is based on the notionthat large infrastructure systems tend to be in a steady state of opertion, and the annual cost of maintenance tends to approximately equal the


annual consumption of the benefits from the asset. Hence, these assetsare not depreciated annually since the cost of maintenance is taken asthe expense for the period. The problem with renewals accounting isthat it often does not differentiate between ordinary maintenanceexpenditure and those amounts that may be considered to be of a ‘cap-ital’ nature; that is, that expenditure that leads to asset enhancement.The distinction between operating expenditure and capital expenditureare key concepts of an accrual system. While debate on the appropri-ateness of these concepts continued during the 1990s, the use ofrenewals accounting has been prevented by the accounting professionthrough the issue of Abstract 30 (UIG 2000).7

Closely related to this concept of renewals accounting is the notionof condition-based depreciation. In fact, the term ‘condition-baseddepreciation’ has been used to cover renewals accounting, deferredmaintenance accounting and other methods applied to complex infra-structure assets or systems with very long economic lives (UIG 1999b).Condition-based depreciation is held to be an alternative to formulae-based depreciation. It avoids the difficult task of estimating the futurelife of the infrastructure asset. Moreover, it directly observes the deteri-oration of the asset (Burns 1992) and considers all the costs that needto be incurred to maintain the operating capacity of the asset by way ofmajor maintenance, replacement or rehabilitation. The UIG in Abstract30 (UIG 1999a) has argued that these methods do not comply with theAccounting Standard on Depreciation where it assumes that all assetshave definite lives, and it may be necessary to separate the ‘network ofassets’ into individual components if each has a different life. Thus, eachof the components can be depreciated based on their estimated life.

The debates focusing on the concepts of ‘maintenance’, ‘deferredmaintenance’, and ‘cyclical maintenance’ are related to the controversysurrounding depreciation. Local government authorities have madesubstantial investments in infrastructure assets. It has only been recent-ly that attention has been paid to the myriad of ways of both reportingon the condition of those assets and quantifying and reporting on themaintenance of those assets. These are important issues, because thereis anecdotal evidence that much of the nation’s infrastructure has notbeen maintained optimally, and for many public sector agencies it is thecondition of their infrastructure assets that is a key indicator of theiroperational performance (Walker et al. 2000).

‘Maintenance’ is defined as regular expenditure on repairs and thelike that keep an asset in its original operating capacity and condition.

7 2 • F I N A N C E

‘Deferred maintenance’ represents maintenance that was not performedwhen it should have been, but was delayed for a future period. ‘Cyclicalmaintenance’ arises from the planned cyclical or seasonal maintenanceprograms that are undertaken periodically and deliberately to ensurethat the asset network is maintained in its original condition. It wascommon practice in local government for authorities to raise a liabilityfor deferred maintenance and for cyclical maintenance. However, inJune 1999 the accounting profession issued UIG 26 ‘Accounting forMajor Cyclical Maintenance’ (UIG 1999a), in which it prohibited thepractice of having these provisions for maintenance. It argued that theydid not meet the characteristics of a liability; that is, there was no pre-sent obligation to pay for this maintenance. The result was that theinformation on management’s intentions with respect to these majorassets and their maintenance is not reported. Although data is scant,there is nonetheless evidence that local government authorities have sig-nificant amounts of either deferred maintenance expenditure or pro-jected expenditure on proposed infrastructure upgrading, and that thisinformation would be of interest to stakeholders (Walker et al. 1999a).

Walker et al. (2000) argue that much of the work of the standardsetters on the depreciation issue has been misplaced because it has con-centrated on ‘technical definitions’ rather than considering the issuefrom the point of view of the users. It should thus ask the question‘What information about infrastructure assets is likely to be of use tousers of the reports?’ Walker et al. (2000) argue that financial data alonewill not meet these information needs, but rather a combination offinancial data and non-financial quantitative and qualitative data is opti-mal. Stakeholders are really concerned with the physical condition ofassets, whether governments have adequately maintained these assets,and what the ‘costs of bringing assets to a satisfactory condition’ are(Walker 1999, p.456). The financial values placed on infrastructure byaccountants, and the discussion relating to balance sheet presentationand valuation, have little relevance to these questions. This data givesno indication about whether the assets have been adequately main-tained. Indeed, it is argued that it is impossible to tell from our currentreporting regimes whether any of the infrastructure assets are at a ‘sub-optimal’ level and hence providing less than efficient levels of service(Walker et al. 2000). This question obviously also relates to the prob-lem of intergenerational equity. Consequently, if information is notbeing provided that allows an assessment of the condition of the asset,then appropriate decisions cannot be taken. This is a matter which has


not been fully resolved and which will continue to be debated in thefuture. It is nevertheless of key importance to accounting standard set-ters as they consider the most appropriate form of financial statements.

REVENUE RECOGNIT ION

It has been argued that the unresolved problem of revenue recognitionfurther undermines the comparability of financial statements. Inessence, this problem revolves around what revenue to recognise ineach financial year (Ryan et al. 2000; Barton 1999a).

The introduction of accrual accounting in the public sector has beena cause for a reconsideration of what constitutes revenue in the publicsector. Under cash accounting there is no distinction made between thedifferent types of cash receipt. However, accrual accounting requiresthat the concept of revenue be considered. For instance, AAS 27(para.24) states that:

The operating statement reports the revenues and expenses of alocal government for the reporting period, and thereby providesinformation relevant to an assessment of its performance for thatreporting period. It enables users to identify the cost of goodsand services provided, and the extent to which that cost wasrecovered from revenues, during the reporting period.

While AAS 27 does not identify types of revenue, the several typesof revenue commonly recognised by local governments include ratesrevenue, user charges, fines and fees, and other contributions, such asgrants and gifts.8

AAS 27 further states that revenue should be recognised when:

(a) it is probable that the inflow or other enhancement or saving in outflows

of future economic benefits has occurred; and

(b) the inflow or other enhancement or saving in outflows of future economic

benefits can be measured reliably.

The major issue in revenue recognition is how to deal with contri-butions such as grants, donations and gifts that are not contributions byowners. For all local government authorities, AAS 27 makes a distinc-tion between reciprocal and non-reciprocal transfers. A reciprocal trans-fer occurs when the transferor and transferee receive and sacrificeapproximately equal value. A non-reciprocal transfer occurs when vol-untary contributions, such as grants and donations, and involuntary

7 4 • F I N A N C E

transfers, like rates, taxes, fees and fines, are made to an entity and thereis no value given in exchange for these contributions. The treatment ofreciprocal transfers is not at issue, but there are questions surroundingthe treatment of non-reciprocal transfers. In general, the private sectordoes not have the equivalent of non-reciprocal transfers. However, inthe public sector, these transfers make up the bulk of the revenue oflocal government authorities, and thus any ‘inconsistencies’ in theirtreatment have the potential to severely affect the accuracy of the resul-tant financial statements, both as an explanation of the results for theperiod under consideration and for comparability purposes.

The debate surrounding the issue of revenue recognition (i.e., whento put the revenue in the accounts) essentially arises because revenue(such as a grant) may be received in one year and yet not expended untilfuture years. This is particularly common for large projects that extendover more than one financial year. In the main, there are two alternatetreatments for revenue that is received and yet not expended in the yearin which it is received. The first is to recognise it as revenue in the yearin which the local government authorities has control over it (or theyear in which it is received), the second is to recognise it as revenue onlywhen it is earned (in the periods in which the benefits accrue).

The first approach, adopted by the Australian standard setters inAAS 27, is that revenue is earned when the authority has control overthat revenue. Thus, in the case of grants received in advance of expen-diture, the standard would dictate that the grants are recognised as rev-enue in the period in which they are received. This period will notnecessarily be the same as the period in which expenditure to providethe asset or service is incurred. Further, the standard does not require aliability to be raised at the end of the period in which the asset isreceived and the services have not as yet been provided. What the stan-dard does require is that if revenue has been recognised and yet theassociated expenditure has not been made (and there are thus condi-tions attaching to the revenue), then this fact must be disclosed in thenotes to the financial statements (see para.92). Further, if the local gov-ernment fails to meet the specific conditions attaching to the contribu-tion and the amount is required to be repaid, it is only then that thelocal government has a present obligation to a creditor that has arisenas a result of a past event: namely, the failure of the local government tomeet the conditions for retention of the contribution. If revenue wasrecognised and the conditions are not met, then an expense and a lia-bility must be raised (see para.69).9


The support for this approach, whereby revenue is recognisedimmediately and no liability is raised immediately, is based on threemain propositions. Firstly, the transfer of funds/assets to the recipientsis not the causal link between the obligation and a past event necessaryfor the transaction to be defined as a liability. Secondly, the obligationcomponent of the definition of liability may be independent of thenature of the right held by the recipient. Finally, a liability can only berecognised if it subsequently becomes probable that a refund will berequired (Westwood and MacKenzie 1999).

The alternate treatment on revenue recognition, adopted by the G4 +110 is that a liability should be recognised for the obligation torepay all or part of a non-reciprocal transfer, with revenue only beingrecognised when the related conditions are met (Westwood andMacKenzie 1999). The arguments in support of this position are five-fold. In the first place, revenue should not be recognised until it is clearthat there is no obligation to return the funds to the contributor. Thiswill occur when the condition is satisfied. Secondly, until the conditionis satisfied the recipient does not have an unconditional right to thefunds/asset. Thirdly, IASC framework principles are breached if rev-enue is recognised immediately as there can be no guaranteed increasein equity until there is no possibility of a liability. Fourthly, an obliga-tion exists until the condition is met in a similar manner to the obliga-tion to repay a loan exists until it is repaid. Finally, this treatment isconsistent with the treatment for reciprocal transfers.

Under this approach, a transfer with a condition attached isdescribed as an ‘obligating event’, whereby the condition is an obstaclethat must be overcome before the transfer can be recognised as rev-enue.11 The G4+1 recognises the conflicting views with respect toaccounting for non-reciprocal transfers with conditions attached, andwhilst the majority of the members favour the second approach, theG4+1 allows for either approach to be adopted.

The implications of the divided opinion and unresolved controver-sy surrounding the revenue recognition debate have been evidentrecently in the Australian standard setting process. The UIG has alsobeen dealing with this same area of controversy albeit with regard to therecognition of university operating grants. The UIG issued an abstracton this issue that was subsequently vetoed by the AASB.12 The UIG inthe vetoed paper took the view that university grants are reciprocaltransfers not non-reciprocal transfers. The UIG in part based this viewon the notion that ‘value can be given directly by a transferee to the

7 6 • F I N A N C E

transferor when goods or services are distributed to third parties onbehalf of the transferor’. The critical distinction in classifying the grantsas reciprocal as opposed to non-reciprocal is that reciprocal transfers cangive rise to a liability whereas non-reciprocal ones cannot. While thespecific issue has been ‘resolved’ at the moment by the political process-es, the ambiguity of the matter has been highlighted and the AASB willultimately need to address the matter more holistically.

The issue of revenue recognition is an important one for local gov-ernment authorities (and indeed for all public sector agencies) since ithas the capacity to impact on the financial statements and their useful-ness both in the short term and in the longer term in terms of compa-rability of results.

C O N C L U S I O N

This chapter has focused on the current state of financial reporting bylocal government authorities. In the last decade local governmentauthorities have changed their financial reporting paradigm from a cashbasis to an accrual basis. While these changes have been incorporated,various conceptual and practical problems have become more visible.Existing empirical research seems to suggest that the ‘one-size fits all’financial reporting model may not be appropriate for local govern-ments. It may be timely for regulators to assess the general-purposefinancial reporting model in light of the diversity in size, asset base andgeographic location of local government. Moreover, there is still con-siderable controversy surrounding the valuation of particular communi-ty and infrastructure assets, and also the recognition of revenue.

However, the larger picture revolves around the development andreporting of performance information for Australian local government,including both financial and non-financial information. There is a con-tinuing need to present information to users that will be relevant totheir particular needs. The development of meaningful and relevant per-formance information will represent a major challenge in the dischargeof the accountability obligations of local government officers to theirstakeholders.

ENDNOTES1 From 1983 until 2000 the Public Sector Accounting Standards Board (PSASB)

set public sector accounting standards. In 2000 the PSASB was merged withthe AASB and now the AASB sets standards for both sectors.

2 AAS 27 was issued in July 1990 by the PSASB to be operative for accountingperiods ending on or after 1/7/93. This followed the publication of DiscussionPaper No 12 ‘Financial Reporting by Local Government’ in 1988 and ED 50


‘Financial Reporting by Local Government’ in 1989. In September 1993 AAS27 was amended and re-issued to take into account implementation issues iden-tified by local government practitioners and regulators. The re-issued standardwas effective from 1/1/94.

3 Queensland presented a dissenting view arguing that the majority of account-ing requirements in AAS 27 were contained in other AASs, and the retentionof AAS 27 was not warranted.

4 Some (for example Barton 2000) would place heritage assets under the head-ing of community assets.

5 Some (for example Barton 2000) would place heritage assets under the head-ing of community assets.

6 The ‘current cost’ methodology has been largely abandoned in the private sec-tor. Tweedie and Whittington (1997) give 5 factors as to why current costmethodology has virtually disappeared from the private sector.

7 The Urgent Issues Group is a committee of the AASB comprised of 16 votingmembers and 2 observers. Its role is to provide timely guidance on urgentfinancial reporting issues.

8 This is to be contrasted to the approach taken in AAS 29 ‘Financial Reportingby Government Departments’ which does list several types of revenue for gov-ernment departments. This difference in orientation may be due to the fact thatAAS 29 was issued later than AAS 27. The sources identified are: user charges,fines and fees; recurrent capital and other appropriations; resources transferredfrom other entities; amounts equivalent to liabilities assumed by other entities;contributions such as grants or gifts; payments for providing agreed outputs,services or facilities.

9 There are dissenting views particularly with regard to voluntary contributionsthat have conditions attaching to them. Some believe that contributions thathave a condition attached to them should be recognised as a liability until suchtime as the condition is fulfilled. The position taken by AAS 27/29/31 is thatcontributions of this nature be regarded as revenue irrespective of whetherthere are any conditions imposed on the use of those contributions. The ratio-nale behind this treatment is that the receipt of a contribution by an entityimposes a fiduciary responsibility on that entity to use the contribution for thepursuit of the objectives of the entity. This fiduciary responsibility is seen to bepart of the normal operations of public sector entities and so even where spe-cific conditions are imposed the view is taken that a liability is only recognisedin the event that the condition is not satisfied.

10 The G4+1 is a group of national standard setting bodies from Australia,Canada, New Zealand, United Kingdom and United States and a representa-tive of the ISAC as an observer. It was disbanded in January 2001 following thereorganisation of the IASC creating the IASB. The G4+1 felt that the creationof the IASB obviated the need for the G4+1 and its continued existence mightdivert resources that could be used by the IASB (G4+1 2001).

11 Although the G4+1 favoured the approach whereby a liability is recognised(the position that has been adopted by US standards) it was divided in its sup-port for the two methods of dealing with contributions of this nature. Witheither approach, full disclosure in the notes about the existence of conditionswas recommended.

12 As the UIG is a committee of the AASB it is controlled by it. The charter forthe UIG in par 25 states that the AASB has the power of veto over any abstractsissued by the UIG.

7 8 • F I N A N C E

It is often argued that there are two key motivators underlying localgovernment amalgamation in Australia. The first is the achievement ofeconomies of scale stemming from larger size that facilitates the effi-cient provision of services. The second derives from the propositionthat the present system of local government formed in the nineteenthcentury is inadequate for the challenges of the twenty-first century(Kiss 1996; Self 1997; Soul and Dollery 1999; Stilwell and Troy 2000;Witherby et al. 1997).

Public sector reform has permeated through to local governmentfrom both the federal and state spheres of governance. As a conse-quence, a renewed preoccupation with structural reform and efficiencyevolved in Australian local government in the 1990s. The subsequentdebate surrounding the appropriateness and efficacy of these reformswas characterised by philosophical polarity. Thus Aulich (1999) hasargued that differences in emphasis with regard to implementation ofNational Competition Policy have resulted in a divergence in the natureof local government systems in Australia. On the one hand, somemunicipal systems place heavy emphasis on democratic notions — theso-called ‘local democracy model’. On the other hand, a ‘structural effi-ciency model’ prioritises the efficient administration of services to localcommunities (Allen 2001).

These philosophical tensions gave rise to two broad genericapproaches to the implementation of local government structuralreform through amalgamation. Dollery (1997) has termed theseschools of thought the ‘voluntary’ model and the involuntary or ‘com-pulsory’ model. The actual choice of approach resides at the level of the

5

A M A L G A M AT I O N A N D V I R T U A LL O C A L G O V E R N M E N T

Paul May

state rather than local government in Australia. A variety of forms ofamalgamation are evolving. They range from the rather simplisticapproach of wholesale amalgamation of two or more existing councilareas through to a recasting of local government boundaries based uponsocial, economic or geographical units and to a more recent mutationknown as ‘virtual councils’. The virtual council approach is to amalga-mate and perhaps even privatise administrative functions in order toachieve of economies of scale and therefore more efficient service deliv-ery without compromising democratic representation (Allen 2001).

Evidence of the achievement of economies of scale and associatedefficiency resulting from larger amalgamated administrative units ismixed (Byrnes and Dollery 2002). Indeed, Chapman (1997) contendsthat structural changes to local government do not appear to have beenmonitored very thoroughly by any level of government in Australia.Nevertheless, attempts have been made to determine the relationshipbetween population size and economic and political performance: inother words, to try and nominate an optimum size for local governmentjurisdictions. This work has contributed to the debate on municipalconsolidation, but has yet to provide convincing empirical arguments infavour of the notion that amalgamation necessarily achieves economiesof scale and thus enhances economic efficiency.

This chapter examines both sides of the debate and weighs theempirical evidence available in the Australian context. Discussion looksinitially at the broad characteristics that underpin local government inthis country, and considers the reasoning which has driven the amalga-mation process across the various states. The third section explores thetensions that can arise between efficiency and democracy. Section fourevaluates the question of optimal size, while the fifth section tackles theissue of virtual local government. Finally, data relating to merger out-comes in New South Wales, Victoria, Tasmania and South Australia arereviewed. The chapter concludes that firm evidence to support the pre-sumed financial benefits accruing from amalgamation is lacking.

C H A R A C T E R I S T I C S O F A U S T R A L I A N G O V E R N M E N T

S IZE AND D IVERS ITY

Local government’s role in the Australian economy is small butnonetheless significant. In 1999–2000 revenue for the sector was over$16 billion or about 2.5 per cent of GDP. Just over a third of income

8 0 • F I N A N C E

was derived from taxes (mainly property rates). The sale of goods andservices contributed about a third of accrued incomes whilst approxi-mately an eighth of revenue was received in the form of grants and sub-sidies. The remaining one fifth of income derived from interest andother sources. It is estimated that local government is responsible forinfrastructure worth more than $130 billion (NOLG 2001, p.5). Thesector expends less than five per cent of total public revenue andemploys approximately one tenth of the public sector workforce(Chapman 1997, p.1; Soul 2000, p.1).

Local government jurisdictions in Australia exhibit diverse character-istics in respect of: population size; geographic area; range and scale offunctions; income and expenditure; the skills of employees; physical, eco-nomic, social and cultural environments; representation ratios of electedmembers to constituent population; and state legislative frameworks forlocal government (NOLG 2001, pp.5-6). Table 5.1 provides a summa-ry of the diversity in local government in respect of population size andratios of elected representatives relative to constituent population.

Available evidence suggests that municipal amalgamations do notnecessarily significantly reduce diversity. For instance, Kiss (1996,p.119) has demonstrated that after the amalgamations in Victoria in theearly 1990s, populations within the newly created local governmentunits varied from less than 10 000 to in excess of 150 000. Moreover,after an analysis of the 1994 Grants Commission data, she concludedthat there were also wide variations in matters such as property valua-

A M A L G A M A T I O N A N D V I R T U A L L O C A L G O V E R N M E N T • 8 1

SOURCE Adapted from NOLG, 2001, p.55.

TABLE 5.1 LOCAL GOVERNMENT AVERAGE COUNCIL POPULATION PER STATE/RATIO OF COUNCILLOR TO CONSTITUENTS 2001

tions on a per capita basis and household incomes within and betweenlocal government areas. More generally, Soul and Dollery (1999, p.39)have lampooned these extreme variations in the size and expenditurepatterns of Australian local government when all jurisdictions have sim-ilar or even identical administrative responsibilities.

CONST ITUT IONAL RECOGNIT ION

Constitutional responsibility for local government rests with the statesand territories rather than the Australian Commonwealth Government.Local government has been formally entrenched in the Victorian andWestern Australian State Constitutions since 1979. South Australianlocal government received recognition in the State Constitution in1980, with New South Wales following in 1986 (NOLG 2001, p.5;Chapman 1997, p.6). Councils are thus a statutory creature of statelegislatures and accordingly amenable to change at the whim of stategovernments.

FUNCT IONS

Local government in Australia tends to have narrower responsibilitiesthan its counterparts in other advanced countries. For example, Australianlocal government is not directly responsible for health, education andpolicing. In essence, the core services provided by Australian local gov-ernment include: construction and maintenance of physical infrastructure,such as roads, bridges, drainage and waste management facilities; regula-tory roles in respect of construction of buildings, operation of foodpremises and animal and noise control; environmental management andplanning; provision of community and recreational facilities and services;the coordination of government services delivered at the local level; andinformation brokerage (NOLG 2001, p.8; Tucker 1997, p.88).

Australian states are not entirely consistent in terms of responsibili-ties devolved to local government. Local government in Queensland,rural New South Wales and Tasmania has responsibility for water andsewerage, but this is not the case for other states. Local government isnot responsible for planning in the Northern Territory whereas in theother states it takes significant charge of that function.

Over the past few decades local government’s role has expandedconsiderably. Factors contributing to this include devolution of func-tions to local government by higher spheres of governance, evolvingcommunity expectations, market deregulation, competition policy,technological change, privatisation and industrial relations reform(NOLG 2001, pp.6–8).

8 2 • F I N A N C E

STRUCTURAL REFORM

Structural reform refers to initiatives involving cooperative service pro-vision, resource sharing or joint-service delivery enterprises.Amalgamation may thus be construed as the most decisive form ofstructural reform. In general, the Commonwealth Government has sup-ported structural reform initiatives either adopted by local governmentor imposed upon councils by a state government (NOLG 2001,pp.53–54). It would not be unreasonable to generalise and espouse thenotion that local government has been more inclined to embrace thesofter options of structural reform relating to cooperative arrangements.State governments have shown an inclination to utilise the more dra-matic options associated with amalgamations.

Structural reform has resulted in a considerable reduction in theabsolute number of councils within Australian between 1910 and 2001as shown in Table 5.2.

DRIVERS OF STRUCTURAL REFORM

Motivating factors triggering structural reform can be categorised as beingeither primary or secondary factors. The primary motivating factors tendto be given greater credence and are regularly highlighted in Australian lit-erature on the subject of structural reform and amalgamation. The sec-ondary motivating factors seem not to be as widely acknowledged and/orare considered to be spin-off benefits of the primary factors. The mostimportant primary and secondary factors are outlined in Table 5.3.


TABLE 5.2 NUMBERS OF COUNCILS IN AUSTRALIA 1910–2001

SOURCE Adapted from NOLG 2001, p.55.

The National Office of Local Government (2001, pp.53–54) makesit clear that the Commonwealth Government has supported the struc-tural reform initiatives of the states in respect of local government gen-erally for the reasons listed in Table 5.3. Dollery (1997, p.448) observesthat Warwick Smith, the Minister for Local Government in 1996, notonly supported structural reform, but also trenchantly argued thatamalgamation of local government units was the most effective way toenhance the efficiency of councils. A similar view was evident in NewZealand where 691 territorial and ad hoc authorities were replaced with13 regional councils. In addition, 73 city and district local governmentbodies and one unitary organisation were also established. Apparentlythe New Zealand Government’s reasoning for implementing suchextensive structural reform was to maximise the efficiency of govern-ment functions that remained after government trading operations weresold to private owners, and all subsidies and barriers to internationalcompetition had been removed (Howell 1997, p.107). In Victoria, Kiss(1997, p.49) contends that the primary objective of the radical restruc-ture through amalgamation in Victoria was to make the sector cost lessin an effort to stimulate growth.

8 4 • F I N A N C E

TABLE 5.3 DRIVERS OF STRUCTURAL REFORM

SOURCES Dollery 1997; Howell 1997; Kiss 1996 and 1997; NOLG 2001; Soul and Dollery 1999; and Stilwelland Troy 2000.

T E N S I O N S B E T W E E N E F F I C I E N C Y A N D D E M O C R A T I C R E P R E S E N T A T I O N

Aulich (1999, pp.17–20) has argued that two significant roles forlocal government, democracy and efficient delivery of services, areoften found to be in tension. He observed that approaches to struc-tural reform in New South Wales, Queensland and Western Australiantended to work collaboratively with councils, thus demonstrating ahigh commitment to local democracy. By contrast, the key value dri-ving structural reform in Victoria, South Australia and Tasmaniaappeared to be economic efficiency. These developments led to theidentification of the local democracy and structural efficiency modelsoutlined earlier. In essence, the local democracy model emphasises thedemocratic notions of responsiveness, representativeness, accountabil-ity and access. The structural efficiency model underscores the effi-cient administration of services to local communities and is thereforemore of a minimalist view of the role of local government (Allen2001, p.15).

Dollery (1997, p.449) has argued that policymakers, like formerMinister Warwick Smith, were well aware of some perceived negativesassociated with structural reform, including diminished communities ofinterest and therefore voter representation and some loss of identity.This concern with the purported loss of community representation hassparked considerable debate ever since.

Soul (2000, pp.108–109) has suggested that too much weight hasbeen given to arguments relating to the perceived loss of political rep-resentation. He argues that since the Australian Constitution does notexplicitly provide a specific standard of political representation for localgovernment constituents, there is thus a lack of substance and legalfoundation to the arguments surrounding representation. Without con-stitutional backing, Australian local government institutions cannot betruly regarded as legitimate democratic entities.

In order to provide empirical support for his argument, Soul (2000)sought to examine whether there was indeed any relationship betweenpopulation size and the political performance of local government inNew South Wales. In examining this issue he found that the ratio ofcouncillor representation to constituents varied from one councillor to74 constituents through to one councillor to 15 666 constituents in dif-ferent municipal jurisdictions. Soul’s questionnaire survey of citizenswithin four diverse local government areas led him to the conclusionthat ‘the analysis of the data found that population size does not signif-


icantly affect constituent perceptions of political performance’ on thepart of the electoral population (Soul 2000, pp.194–227).

However, empirical research undertaken in two small Victorianrural communities appears to contradict Soul’s findings. An examina-tion of voter’s perceptions of the accumulative impacts on their wellbe-ing of policy changes, especially local government amalgamations,appears to have demonstrated that residents experienced a loss of localgovernment focus and community representation (Hallebone et al.2000, pp.214–221).

Howell (1997, pp.107–108) has observed that the principle of sub-sidiarity was not evidenced in the New Zealand reforms of local gov-ernment. Principles such as subsidiarity, transparency, accountability,efficiency, effectiveness, and democracy should all be taken into accountwhen reforming local government. He argued that concentration onone or two of the principles to the needless exclusion of others is a valu-able lesson that should be heeded from the New Zealand experience.The dominance given to transparency hampered the possibility of iden-tifying appropriate options to consider the role of regional and territo-rial government.

A further important aspect of the debate over the tension betweeneconomic efficiency and political representation relates to whetheramalgamation actually strengthens local government. Kiss (1997,pp.63–67) has suggested that the Victorian amalgamations prioritisedcost savings, thus precluding the opportunity to discover the most pro-ductive structure of local government. The problem of the widely vary-ing administrative capacity of councils in Victoria to fulfil theirresponsibilities and meet community needs was not addressed. In fact,amalgamations may not have strengthened local government in Victoriabut simply exacerbated the varying capacities of local government juris-dictions to fulfil local needs.

Self (1997, pp.229–300) has argued that it is not necessarily correctto assume that stronger local government authorities formed as a resultof amalgamations would gain more effective autonomy. His analysis ofwhat happened in England may indicate that the higher levels of gov-ernment had fewer municipalities to deal with post amalgamations; itwas therefore easier to impose stronger controls and reforms. He alsomakes the point that the Australian geographical scale also adds to ten-sions since it sets limits to the desirability of amalgamation.Geographical scale can detrimentally affect accessibility and local senti-ment with respect to local government.

8 6 • F I N A N C E

Witherby et al. (1997, p.119) acknowledge that the relationshipbetween council size and democratic representation may present con-tentious tradeoffs. Further, the hypothesis that systems that facilitatecitizens’ participation and access can uphold democratic principles inlarger councils is not yet proven. Ultimately, there appears to be a needfor balance.

The Inquiry into the structure of local government in eight councilareas in the inner city and eastern suburbs of Sydney commissioned bythe NSW Government in October 2000 is a recent example exemplify-ing tensions between efficiency and democratic representation. TheInquiry conducted by Professor Kevin Sproats was the first major reviewinto council boundaries in inner Sydney for over a quarter of a century.

Empirical research conducted as part of the Inquiry ascertained thatthere was a wide ratio of representation across the Sydney metropolitanarea. It was concluded that there was no definitive ideal representationratio. Opportunities need to be pursued that enhance democracy and facil-itate community participation in information sharing and decision making(Sproats 2001, pp.36–37). The Inquiry identified further tension. It wassuggested that restructuring had to involve more than simply achieving alarger scale of operations. There was a need to be strategically focused sothat the characteristics and aspirations of suburbs at one level and thebroader region at another were properly represented (Sproats 2001, p.48).In a similar vein, Chapman, Haward and Ryan (1997, p.210) suggest that

the important point is that all agree that economy, efficiencyand effectiveness must not overshadow the capacity to govern,not just manage. Amalgamation alone is not seen as necessary,or enough, to promote modernisation (original italics).

P U R S U I N G T H E E C O N O M I C P A N A C E A :O P T I M U M S I Z E

Attempts to determine the optimum size of local government jurisdic-tions have been motivated by efficiency considerations and the theoret-ical prospect of economies of scale. Kiss (1996, p.119) has argued thatresearch undertaken by Manning in Victoria in 1990 has demonstratedthat economies of scale were at that time achievable by local govern-ment authorities with populations of around 10 000, if the range of ser-vices offered were minimal. The full range of services could be deliveredat populations within local government jurisdictions of around 60 000.Larger units were not necessarily more efficient.


Soul (2000, p.57) maintained that work undertaken by bothManning and Moore in Australia demonstrated that unit costs and totalexpenditure per capita were found to be significantly lower in largerlocal government jurisdictions. Soul (2000, pp.81–82) contended thatresearch in the United Kingdom did not allow definitive conclusions tobe made in respect of the relationship between population size andlower cost or greater effectiveness. A slightly more settled conclusionwas reached in respect of Germany.

In order to test the economic performance of local governmentjurisdictions in New South Wales, Soul examined data held by theAustralian Bureau of Statistics (1996 census), the NSW Department ofLocal Government and the NSW Grants Commission for the years1995–96 and 1997–98. He found evidence of a statistical relationshipbetween population size, economic performance and the existence ofeconomies of scale. Trends derived from this research suggested thatlarger local government jurisdictions generally tended to have lowerunit or per capita costs than smaller ones. ‘Optimum utility’, defined asthe best range and quality of local public goods for the least cost, couldbe achieved in non-urban jurisdictions with a population size of about50 000. For urban jurisdictions a fairly ideal population size was ascer-tained to be in the order of 250 000 (Soul 2000, pp.128–130, 192). Inreaching those conclusions it was emphasised that the ‘analysis findsempirical evidence of a weak but positive relationship between increas-ing technical economic performance and increasing population sizeusing data on New South Wales jurisdictions’. It was nevertheless con-ceded that this does not necessarily imply a causal relationship betweengreater population size and increasing economic performance amongstNSW local government jurisdictions (Soul 2000, p.193).

Percy Allen (2001, pp.vii–ix) has provided a counter argument. Hehas argued that available comparative data on unit cost per service doesnot support the conclusion that larger councils are more efficient thansmaller ones. This is further reinforced by the fact that there is littleactual correlation between size and the average rates charged by localgovernments in NSW. It was thus suggested that a reasonable interpre-tation of the NSW data is that larger councils have the critical mass toprovide the broader range of services expected of a modern local gov-ernment without the need to impose higher rates. They are thereforemore efficient only because they can respond to diverse demands for thesame unit cost per resident.

Ronald Oakerson, an American researcher into local government,

8 8 • F I N A N C E

argued that increasing size does not necessarily achieve greater efficien-cy. Fragmentation could enhance efficiency as it creates potential com-petition amongst local governments along Tiebout-type lines.Moreover, Oakerson suggested that smaller local government units areless able to hide the relationship between taxes and services: demand isthus curtailed by communities unwilling to fund costly services. Largecouncils can contribute to efficiency because they are geared for func-tions that have economies of scale. However, most services provided bylocal government exhibit diseconomies of scale (Allen 2001, pp.28–29).

Soul (2000, p.28) makes the point that there is limited empiricalevidence on the efficiency of local government with respect to size. Soulalso recognised that some researchers abroad have claimed that juris-dictions in the range of 50 000 to 250 000 in population can be theleast efficient. The point is surely that these divergent views arise in partdue to the different nature of local public services provided and thewide variation in jurisdictions researched (Soul 2000, pp.72–73).Witherby et al. (1997, p.118) concluded that literature appears to sug-gest that in metropolitan areas economies of scale can be achieved inadministrative costs up to a certain point. However, determining thepoint of diminishing returns is difficult. Including considerations ofgeographical size further complicates the question of whethereconomies of scale can be achieved.

V I R T U A L G O V E R N M E N T S

Those wishing to circumvent the somewhat simplistic approach to localgovernment structural reform of utilising amalgamation of existing localgovernment jurisdictions propose the creation of virtual councils.Virtual councils may well be based on Thornton’s urban parish concept.Vince (1997, p.170) describes John Thornton’s urban parish concept asa process where staff of several small councils are merged into a singleemploying body to facilitate economic efficiency. The electoral struc-ture of the pre-existing councils is maintained. Similarly, Allen (2001,p.x) contends that the creation of a virtual council facilitates the har-nessing of economies of scale in service production whilst retaining therepresentational benefits that smaller local government units can offer.Economies of scale are created by establishing a shared services centre.This is basically an amalgamation of a number of councils’ administra-tive arms and services are outsourced to the larger shared services cen-tre. The shared services centre is owned and controlled by theparticipating councils. Services may be also outsourced to other


providers in the public sector, voluntary sector and private sector.Existing political functions are retained by the requisite smaller localgovernment units.

In essence, municipalities separate the production of services fromtheir provision. Virtual councils thus offer the potential to achieve the‘best of both worlds’ by localising decision making whilst agglomeratingadministration. Put differently, the political apex of a council is organisedon a smaller geographical basis than is the administrative arm (Allen 2001,pp.29–31). The virtual council approach makes it possible for smallorganisations to contract out services that are capital intensive, logistical-ly complex or require specialist skills. These types of services, such as roadconstruction, street cleaning and maintenance, and legal advice, are con-tracted out to producers that capture economies of scale by servicing anumber of client municipalities. Indeed, organisations far larger than eventhe largest local government unit could be contracted to undertake ser-vices. Public utilities might also be able to manage rate collections. Largercouncils providing a greater range of specialist services could be contract-ed by smaller municipalities unable to provide these services economical-ly ‘in-house’. For example, a large council employing specialist planningand design expertise could be contracted by smaller local authorities toprovide these services (Allen 2001, pp.29–31).

Allen (2001, p.31) suggests that the term virtual council is appro-priate because the organisation in question would be small in terms ofcouncillors and directly employed staff numbers, but still be responsiblefor all of the normal functions of a local government authority. Indirectdelivery mechanisms are predominantly utilised to undertake these nor-mal functions. It becomes crucial that virtual councils develop expertisein designing, implementing and monitoring contracts. It would also benecessary to devise an appropriate list of services that could be out-sourced (Allen 2001, p.33).

Allen (2001) utilised the virtual council approach to support theproposition that the Balmain Peninsula should secede from theLeichhardt Council in inner Sydney. He also suggested that there was awider implication of the general argument: smaller councils could bestructured in such a way as to be more democratic, effective and effi-cient than larger scale local government jurisdictions. Politically smallercouncils have a comparative advantage in their ability to deal withmicro-site specific complaints on matters such as development, litter,potholes, broken gutters and dead trees. Council agendas could dealwith issues at a street rather than precinct or ward level. This seems

9 0 • F I N A N C E

appropriate since councillors are often ill-equipped to deal with ‘big pic-ture’ strategic policy issues. They are more adept at dealing with ‘parishpump’ questions and being responsive to local opinion. Small councilsallow council meetings to be concerned with micro-local service deliv-ery problems rather than exclusively the strategic issues (Allen 2001,pp.vii–ix, 13–14).

Secession of the suburb of Balmain from Leichhardt Council wasplaced before the Inner Sydney Inquiry as a structural reform option.Ultimately, Commissioner Sproats was not prepared to recommend thesecession, but he did acknowledged many of the issues raised in themanifesto. These were incorporated into his findings and recommenda-tions on local democracy in the suburbs. It was suggested that, provid-ed there was substantial community support, it may be worth pursuingby way of innovative experimentation (Sproats 2001, p.41). Indeed,small councils, such as Manly, a beachside location in Sydney, are mov-ing towards the virtual council model.

Needless to add, there are ardent opponents of virtual councils, suchas the former City of Sydney Lord Mayor Frank Sartor. He argued thatvirtual councils would have insufficient revenue to provide major infra-structure. Where adjoining larger councils provided major infrastructure,such as aquatic centres, there would be an issue of cost shifting becauseresidents from the smaller virtual council use those facilities withoutmeeting their full costs. Moreover, the accountability problem exacer-bated due to the larger number of administrative entities involved in theprovision of services. Major problems, such as traffic management, tendto be regional questions: solving them could become intractable wherelocal interests might prevail over regional ones (NOLG 2001, p.60).

C H A S I N G T H E P O T O F G O L D

Establishing adequate empirical evidence in support of the economicjustification for amalgamation is somewhat akin to chasing the elusivepot of gold. In common with much of the debate on structural reform,dichotomised positions emerge. Assessments made internationally sug-gest that the local government reform undertaken in the UnitedKingdom during the early years of the Thatcher Government producedlittle visible benefits after more than a decade. There were few enduringamalgamations and no rate cuts. American evidence suggests that larg-er local government jurisdictions appear to be associated with propor-tionately higher spending than smaller ones (Blacher 1999, p.12;Dollery 1997, p.446).


A number of Australian commentators are not yet clearly convincedthat amalgamation of small councils necessarily creates substantialeconomies of scale. Hard data is not easily obtained and reform ofAustralian government is so multi-faceted that the effect of any onechange, such as amalgamation, is difficult to measure. Whilst there may besome evidence available on the actual benefits of economies of scale, thewider question of the effectiveness of amalgamations remains unresolved(Chapman 1997, p.15; Kiss 1996, p119; Witherby et al. 1997, p.118).

There are documented figures for a smattering of examples withinsome of the Australian states. Many of these figures are ambit claims orprojected estimates of savings created through amalgamation.Nevertheless, we will examine some of this data, on a state-by-state basis.

NEW SOUTH WALES

Allen (2001, p.27) examined the NSW Department of LocalGovernment Comparative Information on Councils. He concluded thatthe data does not confirm that large councils are more efficient thansmaller ones if rates and fees and charges are included in the analysis.The comparative information demonstrates that it is not unusual forcouncils in smaller to medium regional centres, and non-urban areas, tohave lower rates and charges than Sydney metropolitan councils. It isacknowledged that this could reflect a more minimalist approach bythose councils with lower rates, fees and charges.

Sydney City Council in its submission to the Inner Sydney Inquiryundertook an analysis as to whether large councils could provide signif-icant economies of scale. It was calculated that the average saving percapita for 20 principal local government function classes utilised by theNSW Local Government Grants Commission was 18.6 per cent. Inextrapolating this figure, the City of Sydney suggested that total expen-diture of a council with a population of 65 000 people would bereduced by about $9 million if the population was increased to 100 000That figure would increase to $27 million if the population were togrow to 200 000 (City of Sydney 2001, p55).

Randwick City Council made the point to the Inner Sydney Inquirythat it had 24 per cent of total residents and 30 per cent of the physicalarea of all the councils that were the subject of the Inquiry but only 17 per cent of total revenue. Randwick City Council believed that itsrevenue raising ability was hampered by the rating base and mix whichrestricted its potential to significantly increase income. Randwick arguedthat it would be better off if there was a higher mix of commercial and/or

9 2 • F I N A N C E

industrial rates. The interesting point raised by Randwick was that itmay not just necessarily be scale that achieves economic benefit in termsof council viability. The mix of rate base may also be a factor (Sproats2001, p34; Randwick City Council 2000, p.33). On the other hand,the City of Botany Bay (another council within the Inner SydneyInquiry area) disagreed with Randwick that industrial or commercialland may be a cash cow for councils in terms of rate income.

The submission made to the Inner Sydney Inquiry by the AustralianInstitute of Urban Studies (2000, p.9) pointed out that work done byKPMG on behalf of the Property Council demonstrated that savingscould be made through amalgamation options. Four options for NSWwere assessed:

• 20 amalgamations based on Regional Organisations of Councils

• the creation of two super councils in the Sydney metropolitan area

• the option of reducing the number of councils in New South Wales to 100

• the option of reducing the number of councils in New South Wales to 50.

The first option was predicted to produce a saving of $845 million,or $350 per household. The second was predicted to produce savingsof $255 million. The creation of 100 councils would produce savings ofsomewhere between $162 and $486 million. The creation of 50 coun-cils throughout NSW produced an indicative saving of $600 million.

The Tourism Task Force agreed with the broad thrust of the KPMGfindings (2000, pp.19–22). Its submission to the Inner Sydney Inquirysuggested that if the eight councils being examined were amalgamatedthere would be a saving of $42.5. million. If the eight were reduced tothree there would be a saving of $7.3 million.

V ICTORIA

Moore’s analysis of Victorian local government (1966) appears to havecontributed to that State’s radical reform program of enforced amalga-mations. He argued that larger councils tended to have significantlylower levels of expenditure per resident. Urban metropolitan councilswith populations of 100 000 or more achieved a 25 per cent reductionin per capita expenditure levels when compared with other urban coun-cils. Local government jurisdictions in the rest of the State with popu-lations of more than 20 000 had per capita expenditure levels in theorder of 15 per cent lower than other councils. It was predicted that byrestructuring metropolitan councils to an average population size of


100 000, and the remainder of Victorian local government jurisdictionsto 20 000, savings of up to $440 million could be achieved within theState (Kiss 1997, p.50; Moore 1996, pp.64–66).

Maclellan (1996, p.10), then Victorian Minister for Planning andLocal Government, suggested that savings identified by the structuralreform in Victorian local government for the 1995–96 financial yearamounted to $323 million. This figure constituted a reduced rateincome of $263 million and efficiency gains of $59 million. Debt reduc-tion was estimated to have improved by $78 million. It was claimed thatthese savings were largely made as a result of amalgamations. In abroader sense Maclellan also postulated that the local governmentreform in Victoria at the time was credited with playing a major part inreduction of Australia’s rate of inflation. Further, he argued, the reformprogram contributed to Melbourne being the only city to post a dropin the cost of living for the first three months of 1996.

It is difficult to determine, however, whether such claims are gen-uine. Vann Gramberg and Teicher (2000, p.479) point out that inVictoria the government imposed a requirement on the newly amalga-mated councils that they achieve $400 million in savings over the finan-cial years between 1995–96 and 1998–99. $300 million of this was tobe set aside for rate reductions.

Savery (1997, pp.163–64) in analysing circumstances at Geelongsuggests that the amalgamation outcome may not have been quite sosanguine. Geelong was the first amalgamation to occur in the radicalrestructure of Victorian local government in the 1990s. The restruc-tured Geelong local government jurisdiction has a population of about190 000. Prior to the amalgamation consultants KMPG estimated sav-ings of $26 million could be achieved as a result of restructuring. Toensure this happened the state government set legislative targets for ratereductions and imposed a rates freeze. Claims are made that Geelongrealised $21 million of savings within 18 months. To achieve the figure,reserves had to be drastically reduced. Savery’s analysis concludes thatchanges in Victoria may have actually contributed to declining localgovernment capacity to sustain core functions due to the loss of criticalmass of human and financial resources. It is presumed that this loss ofmass had to occur due to the legislative targets set for rate reductionscombined with the imposition of a rates freeze.

In a similar vein, Hallebone, Townsend and Mahoney (2000,p.220) looked at the impact of amalgamations on two Victorian ruralcommunities and found that local government mergers resulted in a loss

9 4 • F I N A N C E

of 30 jobs in one town and seven in the other. This in turn triggered amigration of families and local business so that there was a loss of eco-nomic and social capital. The loss of population had negative flow-oneffects that included downgrading of schools and banking facilities.

TASMANIA

Dollery (1997, p.448) points out that Chapman examined the outcomesof amalgamations in Tasmania in 1995 and concluded that administra-tion costs had been lowered considerably. However, Chapman advisedthat interpretation of his findings should err on the side of caution as hisstudy did not deal with the issue of effectiveness. In addition toChapman, Haward and Zwart examined four of the councils arising outof the 1993 amalgamations in Tasmania. Two of the newly created coun-cils were the result of substantial amalgamations. One was an insubstan-tial amalgamation in so far as it was an existing municipality combinedwith a small island municipality. The other council area was not alteredas a result of the 1993 amalgamations. Haward and Zwart found thatadministrative costs for the two councils formed out of the substantialamalgamation fell significantly from around 18 per cent to 12 per centof current payments. There were also significant reductions on a percapita basis. The other two councils revealed no real improvement inrespect of administrative costs. The two councils formed from substan-tial amalgamation did not display a great reduction in staff numbers, butdid indicate increased capacity by employing a greater range of profes-sional staff. All four councils increased rates on a per capita basis(Haward and Zwart 2000, pp.39–40).

SOUTH AUSTRAL IA

It was predicted in the 1998–99 Local Government National Reportthat sustainable annual savings from the South Australian amalgama-tions would amount to between $19 million and $33 million. This wasequivalent to some three to five per cent of council expenditure (NOLG2001, p.57).

Llewellyn-Smith (1998, pp.20–24) subsequently examined amalga-mations in a number of South Australian regions. One amalgamationinvolving two metropolitan councils to form a new council area with apopulation of 101 000 created $2 million of savings in the 1996–97financial year. These were passed on to constituents through rate reduc-tions. The two existing councils on Kangaroo Island were amalgamatedand it has been claimed that this merger would realise annual net sav-ings of $180 000. South Australia’s largest amalgamation involved three


councils forming one entity that would service around 150 000 resi-dents and cover an area of 570 kilometres. Economic analysis predictedthat annual savings of $3.5 million would be gained through cost effi-ciencies as a result of this restructure.

An interesting form of merger in South Australia has been the cre-ation of a federation of councils. Two newly created councils formedout of amalgamations established a combined administration arm to ser-vice the two organisations. Each council retained political indepen-dence. The federation was formed to achieve maximum economicbenefit in a sparsely populated area whilst retaining local accountability,decision making and planning.

Overall, in South Australia it has been asserted that amalgamationsthat reduced the number of councils from 118 to 69 would achievetotal recurrent savings of $13 million for metropolitan areas over theperiod 1995 to 1997. A further $6.3 million of recurrent savings wouldbe achieved amongst country councils.

C O N C L U S I O N

Evidence concerning the achievement of economies of scale and finan-cial efficiency appears to be grounded far more in prediction rather thanactuality. This perhaps reflects an agenda where the potential justifica-tion for proceeding down the amalgamation path has been given greaterpriority than ascertaining actual proof of financial success. Economicefficiency, while important, constitutes only one dimension of thebroader objectives of effective local government. It may well be that anover-emphasis on economic efficiency would be at the cost of reducinglocal government capacity.

There is also the temporal dimension. Savings may well be a short-term phenomenon as individual council priorities evolve. The determi-nation of the optimal size for a particular council may also be difficultas so many variables come into play over a period of time. It has beenacknowledged that there may be varying optimal sizes, depending uponcouncil type adopted, the priorities involved, and location. The opti-mum size for a metropolitan council would most likely be different tothat for a rural one.

Some of Allen’s arguments justifying the creation of virtual councilsappear a little curious. He contends that local democratic representationenhances councillors’ abilities to be involved in day-to-day small-scaleservice delivery issues. This involvement enables elected local govern-ment representatives to better understand community needs and reflect

9 6 • F I N A N C E

community values. Thus councillors become more responsive. On theother hand, Allen also asserts that councillors are often ill-equipped todeal with strategic and big picture issues. The dilemma is that local gov-ernment reform has tended to pursue the notion that councillors shouldbe concerned with policy, strategic and big picture issues and have lessto do with day-to-day operational matters.

Generally, it appears that in terms of local government structuralreform the majority of state governments, and perhaps the FederalGovernment as well, tend to prefer amalgamation. The range of choic-es for implementation range across a broad spectrum from enforcedamalgamation to encouragement of a voluntary approach. Dramaticstructural reform sends a clear message to local government that thingsneed to change.

The recent Inner Sydney Inquiry talks about structural recastingrather than amalgamation. In the Inquiry’s view, the enhancement ofcapacity took a far higher priority than the achievement of economies ofscale. The object of the recasting was to provide strategically focusedcouncils that would be better resourced to enhance capacity to deal notonly with local issues at the place and suburban level but also regionalproblems. The recommendations of the Inquiry also attempted toresolve at least some of the tensions created between the achievementof economic efficiency and democratic representation.

It is apparent that the debate arising out of amalgamation optionsand structural reform has generated the need to deal with some funda-mental questions. A discussion about what local government should beand do ideally needs to precede structural reform. The variousapproaches to, and forms of, amalgamation fundamentally inform per-ceptions of what local government is about. Action to date suggests thatlocal government basically exists to facilitate service provision at thelocal level. If local government is just about service provision then whyhave it at all? As Sproats (2002, p.14) suggests, if local government isexclusively concerned with service provision then why structure it theway it is at present? If society’s aspiration is to have local governmentthat balances economics with equity and local democracy then the focusshould be on appropriate structural reform to enhance local govern-ment’s capacity to function in that manner.


PA R T C G O V E R N A N C E A N D

M A N A G E M E N T

During the last decades of the twentieth century, neo-liberal ideas,fuelled by economic crises, technology and globalisation, dominatedpublic policy. While the period saw a range of attempts to bring aboutsmaller government, free up the global market and enhance individualchoice, there were also some side effects. The collapse of communismin Eastern Europe not only increased the range of the capitalist marketbut also led to an interest in creating democratic conditions and democ-racy. Local governments became one focus of this interest (Coulson1999; Gibson and Hanson 1996) Similarly, the development of theEuropean Union, in which national governments more or less cooper-atively conceded elements of their independence, also raised questionsabout democracy or popular control of the new Europe-wide institu-tions. Localism and regionalism benefited from these currents also, as,for example, in the United Kingdom where Scotland, Wales andNorthern Ireland gained degrees of self-government.

Along with the emphasis on the market and individualism came adebate about civil society and community. Communitarian ideas, in par-ticular, were reasserted as political theorists and politicians proclaimed theneed to bring society back in. Social connectedness and community weredeclared to be the answer to selfish individualism and irresponsibility:

References to communitarianism and invocations of the value ofcommunity reflect a widespread fear, to the left, right and cen-tre of the political spectrum, that market individualism threatensto atomise society (Frazer 1996, p.89)

Australia, needless, to say did not escape untouched by these currents

6

R E A S S E R T I N G L O C A L D E M O C R A C Y ?

Rosemary Kiss

(Pusey 1991; Weller and Davis 1998). Neither did Australian local gov-ernments, which, at the behest of state governments, arguably under-went more comprehensive change than the other spheres ofgovernment in Australia. New Local Government Acts were promul-gated in Victoria (1989), New South Wales (1993), Queensland (1993)Tasmania (1993) Western Australia (1995) and South Australia (1999).These legislative changes were considered to have brought about ‘thetransformation of local government’ (Dollery and Marshall 1997, p.vi).Marshall and Sproats (2002) observed that strategic management wasat the core of the Australian states’ local government reforms. Yetstrategic management tools such as annual reports, corporate manage-ment plans, customer surveys and performance indicators, accompaniedother arguably more profound changes, chief amongst these being theprivatisation of the provision of many local government services and theamalgamation of municipalities into larger units. Larger local govern-ment areas, while the product of a long-held view that they promisedeconomies of scale over smaller ones, sat well with the other manageri-alist and neo-liberal imperatives. Alongside an overriding emphasis onthe role of local government as an efficient manager of local services forprice-focussed customers came a reduction in the number of electedrepresentatives, who were pressed to see themselves as company direc-tors whose role was to steer not row, and to make policy not to man-age, that responsibility belonging to chief executives. This trend wasmost clearly articulated in Victoria, where the number of councils wasreduced from 210 to 78 and the number of councillors from just over2196 to 589 (Johnstone and Kiss 1996; Kiss 1999a; Galligan 1998).

In the same decade, however, other types of influences were alsofelt, leading some local government practitioners and commentators tobelieve that the general thrust of change would set local government inAustralia on a path of renewal and enhanced importance. The detailedprescriptive and proscriptive local government legislation of the past(built on the principle of ultra vires), which resulted in huge acts cover-ing every aspect of councils’ operations, was replaced by more stream-lined acts. Local governments in all the states except New South Waleswere given the authority to provide generally for the good governmentof their districts. It was held that this new legislative approach resultedin Australian local governments acquiring powers of general compe-tence, or the power to take any action not expressly forbidden by otherlegislation, giving them greater autonomy and scope to exercise initia-tive (Wensing 1997). The accord between the Keating government and

1 0 2 • G O V E R N A N C E A N D M A N A G E M E N T

local governments represented by the ALGA, which was followed bythe admission of local government representatives to executive inter-governmental forums such as the Council of Australian Governments(COAG) and included a Commonwealth commitment to constitution-al recognition for local government, was also thought to herald a newera in which the importance of local government would be acknowl-edged (Wensing 1997; Chapman 1997)

A wide-ranging interest in the relationship between local govern-ments and community also surfaced in Australia. The term ‘communi-ty’ became commonplace in local government discourse. Following theEuropean Charter of Local Self-Government and the InternationalUnion of Local Authorities (IULA) Worldwide Declaration of LocalSelf-Government, Australian local governments, at their NationalGeneral Assembly in 1997, proclaimed their democratic communitygovernance role:

Local governments are elected to represent their local commu-nities; to be a responsible and accountable sphere of democrat-ic governance; to be a focus for community identity and civicspirit; to provide appropriate services to meet community needsin an efficient and effective manner; and to facilitate and coor-dinate local efforts and resources in pursuit of community goals(ALGA 1997).

This self-description by local governments had some support in leg-islation. Every Australian Local Government Act contained reference tothe local government/community nexus. Queensland’s Act conferredautonomous responsibility on local governments for the good rule andgovernment of their areas, provided for community participation in thelocal government system and promised a minimum of intervention bythe State. Victoria enacted legislation intended to provide an account-able system of democratic, efficient and effective local government, giv-ing councils powers to enable them to meet the needs of theircommunities. Tasmania’s Act expected councils to plan for, develop andmanage municipal areas in the interests of their communities. In NewSouth Wales, the Act required effective participation of local communi-ties in the affairs of local government and expected councils to carry outactivities appropriate to the current and future needs of local commu-nities and the wider public. Western Australia expected its local govern-ment legislation to achieve community participation in the decisionsand affairs of local governments and better decision-making by and

R E A S S E R T I N G L O C A L D E M O C R A C Y ? • 1 0 3

greater accountability of local governments to their communities. SouthAustralia’s Act proposed to encourage participation of local communi-ties in the affairs of local government and to provide local communities,through their councils, with sufficient autonomy to manage the localaffairs of their area. Thus, state governments, like local governmentsthemselves, decreed that local governments were to be closely linked totheir communities.

On the surface, therefore, it might appear that the 1990s were yearsof progress for local governments in Australia. On the one hand, neo-liberally-inspired reforms would make the system more efficient and, onthe other hand, community aspirations, reinforced by accountability toa participatory community, would provide the system with purpose andlegitimacy. Local government could thus aspire to gaining full recogni-tion as a partner in the Australian federal system.

In this chapter, however, I argue that despite the considerable inter-ventions and adjustments of the last decade of the twentieth century,local governments in Australia have not been effectively reformed orpositioned to meet the needs of the new millennium. There are manyreasons for this, some of which I have dealt with elsewhere (Kiss 2002a;2002b) and others are discussed in this volume. This paper will concen-trate on only one issue, legitimacy. I argue that local government’s legit-imacy has been weakened instead of strengthened during the 1990s,firstly because of the way local governments have been locked into thenebulous phenomenon of community and secondly because this hastaken attention away from the need for local governments to stake theirclaims for legitimacy on being the democratic representatives of theirlocal area, by which I mean the resident citizens of the locality.1 My firstpoint is made through an examination of the meaning and usage of theterm ‘community’. I show that the concept is confused and contentious,is not regarded by other spheres of government as the special domain oflocal government and has actually provided the basis for attacking andbypassing local governments and weakening their representative capaci-ty. My second point is made by examining the local government fran-chise. I show that it still contains significant elements of property voting(strengthened by the innovation of universal postal voting2 in Tasmania,South Australia and Victoria) with the consequence that local govern-ments continue to fail to satisfy the test of representative local democra-cy. This, I conclude, remains a fundamental problem of Australian localgovernment and continues to hamper its ability to achieve the status itaspires to as a recognised partner in the Australian federal system.


W H A T I S C O M M U N I T Y ? 3

In 1955 a survey identified 94 different ways in which the term ‘com-munity’ was used. The only common feature was that they all dealt withpeople in some way (Hillery 1955). A key element of the idea of com-munity comes from the discipline of sociology and, more particularly,the work of Ferdinand Tonnies, who, in the latter part of the nineteenthcentury, used the words Gemeinschaft (community) and Gesellschaft todifferentiate two abstract or ideal forms of human association.Gemeinschaft was based on mutual allegiance, harmony, kinship, com-mon identity and tradition, while its antithesis, Gesellschaft, was a wayof life, increasingly common in the modern urbanised and industrialisedsocieties of the later nineteenth century, in which impersonal relation-ships were held together by contractual and formal ties based only onshared self-interest and organised by various administrative or bureau-cratic means (Tonnies 1963).

The crises of world wars, movement of peoples and industrialisation,which marked the first half of the twentieth century, reinforced socio-logical attempts to understand community. Studies were carried out inplaces as far removed from one another as Australia, where the subjectwas the aboriginal peoples, through rural populations in Mexico andsouthern Italy to urban settlements in the United States. Bell andNewby identified, within community studies, six different approaches.These were to view communities as organisms (ecological), as organisa-tions, as microcosms, as types, as networks and simply as a source ofobservable data (community studies as method). Their judgement onthese studies was that:

They are, at one and the same time, some of the most appealingand infuriating products of modern sociology. They are appeal-ing because they present in an easily accessible and readable way,descriptions and analyses of the very stuff of sociology, the socialorganisation of human beings; and infuriating because they areso idiosyncratic and diverse as to steadfastly resist most attemptsto synthesise their findings … [O]ut of community studies, therehas never developed a theory of community, nor even a satisfac-tory definition of what community is (Bell and Newby 1974).

Amongst the areas of confusion was the fact that community couldbe used to describe anything from small, fairly homogenous groups orit could be applied to very large and diverse populations. Especially butnot only in urban areas, it was also apparent that networks were found


to spread well beyond local boundaries, there being no correlationbetween proximity and the strength of private, business, or other rela-tionships (Suttles 1972, p.8). Moreover, local communities might bedefined not by their internal coherence but by their difference fromtheir neighbours (Suttles 1972, p.21).

By the mid 1970s, therefore, there had been a substantial retreatfrom the original idea of community, with Tonnies himself beingaccused of having offered a romanticised view of community. A work-able way to theorise community, therefore, might be to eliminate theromantic elements and simply regard it objectively as the sometimesfriendly, sometimes conflict-ridden, sometimes strong, sometimes weakset of relationships amongst people living in any given area. People insuch an area might well find that external associations and bonds mightbe both stronger and more numerous outside their local area than in it.Community could now be used to describe virtually any place — smallor large — with some form of separate but by no means exclusive organ-ised existence (Elias 1974). Not surprisingly, this opened the door tothe argument that such concepts of community were so vague as to beuseless (Stacey 1974).

The idea of community persisted, however, and the term has con-tinued to be used widely and loosely. There are community arts, com-munity policing, community housing, community-based organisations,community development, community workers and, more recently,community building. There is also an unlimited variety of communities,ranging from the small to the large and the particular to the universal,embracing communities of religion, language, profession, values, placeor, simply, common humanity, as for example: ‘the university commu-nity, the scholarly community, the Jewish community, the Aboriginalcommunity, the medical community, the scientific community, the busi-ness community, and even the international community’ (Kukathas1996, p.83). Governments and non-government organisations havealso been pursuing the community agenda, running departments ofcommunity services and seeking, for example, community indicators,sustainable communities, healthy communities, equitable communitiesand community strength (Wills 2001; Raysmith 2001).

Underpinning this continued usage was a resurgence in communi-tarian and community-inspired writings which, once more, sought tooffer a way to recover social solidarity, the loss or absence of which hadbrought about dysfunctional people and societies. Some emphasised thecentrality of shared meanings, symbols or values, leading to theories


about the relationship between community and identity, social struc-tures, legal frameworks, citizenship and the polity. This could take theform of a direct attack on liberal individualism by asserting the need forpolitical theory to acknowledge the social construction of the individualand for policy to build on it (Lerner 1996, pp.3–86; Etzioni 1995).Alternatively, as for Etzioni, communitarianism could constitute anactive political agenda calling for the restoration of civic virtues and themoral foundations of society so that people would live up to theirresponsibilities and not merely focus on their entitlements (Etzioni1995, p.ix). This also opened the door to those who embraced the ideaof community as a means of justifying smaller government, more vol-untarism and non-government responsibility.4

The idea of community, therefore, has continued to be both vagueand problematic. While communitarian ideas which emphasise variousformative interconnections and interdependencies amongst peoplehave been an essential corrective to the extremes of liberal individual-ism and the primacy of market relations, they present several majorproblems as a basis for the legitimacy of local government.5 Firstly, nolocal government area exists as a single, coherent community, except inthe most meaningless or loosest usage of the word. Secondly, once theterm community is used as a loose description, it can be applied inmany contexts and can be claimed by any sphere of government as itsrepresentational base.

C O M M U N I T Y A N D L O C A L G O V E R N M E N TL E G I T I M A C Y

Tasmania experienced two exercises in local government restructure inthe 1990s. The first state government appointed board reported in1992. This board actually developed a useful description of a local com-munity as one in which each citizen would feel able to be politicallyeffective by having his or her views given proper consideration (TLGAB1990, p.24). Nevertheless, the board concluded that the number ofcouncils should be reduced from 46 to 29, reasoning that modern localauthorities could use technology to bind people together and offer ser-vices over larger geographic areas. Thus ‘larger’ could still remain ‘local’(TLGAB 1992, p.43). The board added that it had undertaken studiesto examine the possibility of greater reductions but had come to theconclusion that this would be politically unacceptable and the resultingstructure would be unable to be seen to be local in nature (TLGAB1992, p.46).


Four years later, however, a new board was appointed to carry outfurther amalgamations. This board, which reported finally in 1998,challenged the relationship between community and locality:

The concept of community of interest has changed over timeand many people no longer relate exclusively, or even verystrongly, to the locality in which they reside. Social changesrequiring families to relocate and ‘spread out’, limited optionsin relation to employment, changes in entertainment optionsand provision of new leisure facilities all result in a series ofchanging and expanding communities of interest. This is muchmore so in urban areas where the evidence suggests that thedemarcation of communities of interest is much more blurredand ill-defined (LGB 1997, p.26).

There was ‘little agreement’, they claimed, about what the term com-munity of interest actually meant. Besides, although they had found thatmany people related very closely to the immediate area in which they lived,this did not translate to identification with their municipal boundaries.6

Since these boundaries had only recently been created, this was hardly sur-prising. So it was that the board was able to recommend that the numberof councils in Tasmania should be reduced to 11. Only a change of gov-ernment prevented the implementation of the recommendations.

The restructure of Victorian local government in the 1990s similar-ly touched upon this question of the relationship between local gov-ernment and community. The Victorian board was constituted to advisethe Minister on matters relating to the efficiency and effectiveness of thesystem of local government and on financial issues relating to local gov-ernment. It was also to conduct reviews and report to the minister onmatters of local government restructuring. In carrying out its reviews,the board was given discretion to have regard to all or any of a largenumber of considerations, of which community or diversity of interest,including community identity, formed only a small part (VictorianLocal Government Act 1989, Parts 10A, 10B)

It was understood, however, that, as part of its efficiency and effec-tiveness remit, the board’s central objective was to achieve a reductionin the number of municipalities (Kiss 1997). Consequently, the board’sapproach was heavily weighted towards issues of economic develop-ment, rate reduction and related operational matters. In less than 18months, 210 municipalities had been amalgamated to 78. It was quiteclear that boundaries could have been drawn in any number of ways, in


large part because community of interest was not a meaningful concept,except where it could be used to argue that existing local governmentboundaries divided communities or, more precisely, commercial areas(Burke and Walsh 1998).

If we consider the effects of this type of reasoning, we can see thatlocal governments throughout the country have been, and continue tobe subject to restructuring and amalgamation or dismemberment.Community provides no defence. As well, let us not forget that amal-gamations have also reduced the number and increased the remotenessof elected representatives. During the period of amalgamations in the1990s, for example, Tasmania reduced its number of councils from 46to 29, and its councillor numbers from 460 to 288, a decline of 37 percent. South Australia went from 118 councils to 76 and from 1100elected members to 760, a fall of 31 per cent. Victoria’s council reduc-tion program took the 210 councils to 78, and the elected representa-tives from 2196 to 589, a massive fall of 73 per cent. Measured againstpopulation, the average ratio of elected local representatives, though anindicative measure only, is presented in Table 6.1.

Ratios of this magnitude may be compared with the countries ofEurope, such as France (1:116), Germany (1:250), Sweden (1:667) orPortugal (1:1125). Even in the United Kingdom, where municipalitiesare much larger after several decades of reorganisation, the ratio is1:2700, thanks in large part to the fact that there is some relationshipbetween the population of a local authority and the number of elected


NOTE * Australian Bureau of Statistics: 2000 population estimates based on projections from the 1996 census.

TABLE 6.1 AVERAGE RATIO OF COUNCILLORS TO POPULATION X STATE (2000)

representatives (Wilson and Game, p.228). Local governments with largepopulations make it more not less difficult to achieve participation and anactive citizenry, notwithstanding efforts to practise ‘community consulta-tion’ and to carry out satisfaction surveys (Oliver 2001, pp.33–67).

In addition, despite legislating about local government and com-munity, other spheres of government fail to take seriously local govern-ment claims to be the voice of the community. This was clearlyarticulated by the Victorian Minister for Planning and LocalGovernment in 1996, just after the first round of local government elec-tions following the period of local government rule by state-appointedcommissioners:

I am sometimes bemused when I meet with councillors whopreface their comments by saying: ‘The community objects tothis, or the community demands that’. What precisely are theyreferring to? At best, their legitimacy derives from that smallpart of Victoria which elects them.

This, of course, provides them with a seat at the table, butnot a right to dictate outcomes in relation to issues of state sig-nificance, because when it comes to “legitimacy” to representthe community, there is no doubt that the State Parliamentreflects more accurately the will of the Victorian communitythan do any number of councillors of councils….

[Moreover] residents and ratepayers of our municipalities aremore concerned with the services they receive from their coun-cils, and what they pay for those services, than with having asomewhat intangible “sense of community” supposedly provid-ed by a council chamber… What emerges from a considerationof this issue is the broad range of ideas about what constitutes acommunity and what provides a sense of community… So it is atthe least misguided, and at the worst conceited, for some of ourcivic leaders to believe that they are the sole custodians of thesense of community (Maclellan 1997, pp.11–13).

Any sphere of government, therefore, can lay claim to representingthe community.

Furthermore, the claim to community voice entitlements extendsalso to non-government agencies.

As has also been apparent in more recent ‘community building’exercises, local governments need not figure at all in the communityequation. The Commonwealth government, for example, announced


its Stronger Families and Communities Strategy in April 2000 andbased that strategy on initiatives aimed at achieving strong leadership,private-public partnerships and helping voluntary workers build skills sothat local solutions could be found to local problems. Local govern-ment did not seem to be important to the strategy.

State governments, too, as in Victoria have engaged in similar pro-grammes. In 2001, the Bracks government announced that theCommunity Support Fund (derived from gambling revenue) would beused to support community building. This would involve funding oneproject focusing on ‘the indigenous community’ and others ‘based onthe particular concerns of the community and partners involved (sic)’.Communities could decide to ‘find new people to play a role in localorganisations or form new groups to address community issues; identi-fy new employment activities [to] benefit residents and businesses;request new resources to meet emerging needs; and make services moreappropriate for people from different cultural backgrounds’. Therewere, it was said, non-government agencies and church, business andphilanthropic organisations keen to participate and the fund could makegrants ‘to partnerships involving community organisations, as well aslocal governments seeking to undertake community building initiatives’(Black and Hughes 2001, p.7).

L O C A L G O V E R N M E N T , D E M O C R A T I C R E P R E S E N T A T I O N A N D T H E F R A N C H I S E

During the 1990s, one of the effects of the community discourse hasbeen for local governments, in particular, to be expected to engage incommunity participation. There is virtue in all governments beingopen, consultative and accessible. Public consultation and participation,however, are a supplement to, not a substitute for, representativedemocracy (Kane and Bishop 2002). It is the elected who must makethe final decisions or delegate decision-making. For local governments(as for others) this requires clarity about precisely who they representand on what basis. Other spheres of government in Australia, and localgovernments in all the other advanced western democracies, representpeople on the basis of citizenship and residence in an electoral districtand in fulfilment of the democratic principle of one vote, one value.7

This is not true of local governments in Australia, except in Queensland,which is the only state to have eliminated property entitlements fromthe local government franchise. Except in Queensland, eligibility to


vote is conferred upon non-resident owners of rateable property and,subject to qualifications about tenure, to occupiers. Corporations aretreated as owners.

The local government franchise is hardly ever discussed in Australia.The property element is left over from the nineteenth century beforethe democratic principle became established. While the property basisof voting was gradually eliminated for other spheres of government overthe course of the twentieth century, this did not happen for local gov-ernment. The only development in Australia, except for Queensland,has been to admit resident citizen voting alongside but not in place ofproperty voting. One reason for this is likely to be that local govern-ments have traditionally been responsible for property-based services —roads, rates and rubbish — and property taxes (rates) provide over halfof the average income of local governments (ABS 1998). This leadssome to argue that there should be ‘no taxation without representa-tion’, the catchcry of the American war of independence.8 This, how-ever, is not justified. Americans wanted their own government, not rulefrom Britain. Furthermore, there are many people, such as, for exam-ple, unnaturalised foreigners living and working in Australia, who paytaxes but are not entitled to vote. Unfortunately, local governments,which continue to be elected by a constituency that includes property-based voters, cannot claim democratic legitimacy. Moreover, whereproperty-based voters are permitted and encouraged, election outcomeswill not reflect the will of the people of the local area.9

The central criterion of local government is that it is the represen-tative decision-making body of a locality. What flows from this is thateach local government must represent and reflect the will of the peoplewho live in its local area. Visitors, people who work or run businesses inthe area, and even those who own property but live elsewhere, will cer-tainly need consideration and even have certain entitlements such as, forexample, safe roads and streets as well as various forms of access to thedecision-making processes of the local government. They do not need,nor should they be entitled, however, to vote for that local government.Only the local ‘citizen’ who is tied to the area by virtue of living in itshould have the right to vote in local government elections. Only onthis basis can the local citizen participate actively. Only on this basis canlocal government fulfil its role of voice of the local people. As well, thelocal citizen’s participation needs to take place on an equal or equitablebasis of equality of voting. No person should vote more than once in alocal government election, not just in a municipality or a subdivision.


Each person should only vote in her or his place of residence. This is theessence of democracy. Whether we are dealing with representative orparticipatory democracy, popular control and political equality are thekey democratic principles (Beetham 1996, p.30). How does Australianlocal government measure up then?

In New South Wales, the principle of one person, one vote is tech-nically observed by allowing a person only one vote in each municipalarea (though not the State, as a whole). As well, only one owner oroccupier of property held jointly can vote in a municipal district. Inother words, no matter how many properties may be owned, only onevote can be exercised. An additional requirement is that non-residents(persons wishing to exercise their vote on the basis of property-basedeligibility) must apply for the vote. In a similar arrangement, SouthAustralia also allows residents, ratepayers who own property solely, andone nominee from a body corporate or from a ‘group’ of joint-ownersor occupiers of a rateable property, to vote. In Western Australia, thetreatment of property is more generous: property-based eligibility enti-tlements allow two joint owners or occupiers to vote where multipleownership/occupation exists. As in NSW, both South Australia andWestern Australia stipulate that a person may only exercise one vote ina municipal area.

Tasmania and Victoria are the states which still allow the possibilityof property-based plural voting. In Tasmania, although those eligible tovote on a property franchise must apply to be enrolled, it is possible fora person to exercise two votes in a municipality, one in their own right,and one as the nominee of a body corporate. The Act does not addressthe issue of the voting rights of joint owners/occupiers. Victoria is themost extreme case. It was not until 1982 that residents gained the rightto vote. Previous property-based entitlements continued to be recog-nised, however. Since the ‘reforms’ of the 1990s, the nature of which Ihave discussed elsewhere (Kiss 1999a), these property-based entitle-ments have been reinforced in a number of ways.

A key feature of Victoria’s local government voting provisions isthat the relevant sections of the Local Government Act 1989 refer tomunicipal subdivisions (wards or ridings) not to municipal units. As aresult, the stipulation that only one vote can be exercised by an indi-vidual applies only to the subdivision, not to the municipality. While thisdoes not affect those with a residential voting qualification, it meansthat property owners with several properties dispersed throughout amunicipality may vote once in each ward where these properties are


located. Since most Victorian municipalities are subdivided, there is aclear potential for multiple voting. A further multiplier of the propertyvote arises where property is jointly-owned or occupied. In such cases,two persons are eligible to vote and are automatically enrolled.Additional joint owners/occupiers may also vote but must actuallyapply to be enrolled.10

Corporations are another category of municipal voters. While gen-erally they are able to nominate one person to vote on their behalf, inthe City of Melbourne, special provisions exist requiring them to nom-inate two persons. In the City of Melbourne where, as in other finan-cially important Australian capital cities such as Sydney, the propertyand business lobbies are both strong and active, property-eligible votersare compelled to vote. This is not true of the rest of Victoria where vot-ing in municipal elections is only compulsory for residents.

This support for non-resident, property-based voting has been rein-forced by the growing practice of universal postal voting for local gov-ernment elections that was introduced to Australia by Tasmania,following the example of New Zealand. The main argument presentedin its favour was that, in systems where voting is voluntary and turnoutfigures can be embarrassingly low, it increases the vote (Herr 1995).There are some grounds for arguing that this is only partly true and, inany case, there may be other and better ways to achieve this objective(Kiss 1999b) Nevertheless, whatever its putative merits, its use hasbecome quite widespread in Australia.

In Tasmania, where voting in local government elections is volun-tary, and half-elections occur every two years, universal postal votingwas introduced on a trial basis in 1993, and used for the first time in the1994 and 1996 elections. Thereafter, the Tasmanian state governmentlegislated to make it compulsory to use postal voting in local govern-ment elections. Western Australia and South Australia have both givencouncils the option to conduct elections by universal postal voting and,especially in South Australia, where there has been considerable encour-agement for them to do so, most councils have adopted it.

In the states where voting in local government elections is compul-sory — Queensland, New South Wales and Victoria — a divergent pat-tern has emerged. In New South Wales, universal postal voting is notallowed. In Queensland, it is allowed, subject to conditions, only inshires or towns covering large rural areas. In Victoria, although univer-sal postal voting is optional, almost all municipalities (about 85 percent) have adopted it, predominantly during the period of administration


by state government-appointed commissioners. Its use was stronglyadvocated by the previous government and is supported by theVictorian and Australian Electoral Commissions, which compete forcontracts to run elections and have invested considerable amounts inthe necessary technology.

In a democratic electoral system, based on the principles of univer-sal adult suffrage and one vote, one value, there may be a case for theuse of postal voting.11 Where non-resident property-based voting ispart of the electoral system, however, universal postal voting makes iteasier for those property-based voters to vote. Evidence that this hashappened is available in the case of Victoria, where the VictorianElectoral Commission has drawn attention to the higher rate of partic-ipation achieved amongst non-resident voters. Similarly, in the City ofMelbourne’s 1996 post-election review, it was noted that the partici-pation rates amongst all categories of voters had become similar (resi-dents — 66 per cent; absentee owners — 61 per cent; businessoccupiers — 61 per cent; corporation representatives — 67 per cent),‘representing a major turnaround on previous elections where non-res-ident participation was extremely low’ (Kiss 2000, pp.13–16).Universal postal voting, unlike postal voting as a supplement for peo-ple who find it difficult to vote at polling booths, is more likely to assistnon-residents than residents to participate and, in consequence, fur-ther strengthens the property rather than the democratic underpin-nings of the system.12

C O N C L U S I O N

Local government in Australia, as in other parts of the world, is underpressure to perform. The pressures come from all directions — global,national, state and local. State governments, because of their law-mak-ing powers over local governments, have continuously intervened in thelocal arena, often introducing the current administrative, managementor ideological fashions. The communitarian concepts that came with theinterventions of the 1990s, like so many other changes of this period,have not been beneficial for local governments. Rather, they have con-tinued to weaken the democratic legitimacy of local governments andleft them in a position where they cannot properly represent the peopleof their local areas. Local government in Australia, therefore, is not asphere of democratic government nor is it likely, unless Australiansassert their right to local representative democracy, that local govern-ments will gain the respect of other spheres of government.


ENDNOTES1 My argument is consistent with although it differs considerably in its focus

from that of Elizabeth Frazer whose work is cited above. She does not engagewith the issue of democracy, this being a given in the local government systemwith which she is concerned. Her view is well summed up in the following:

a prescriptive argument for local government needs only to emphasise thevalue of care for localities, and the needs of people living and working inand using localities. To invoke community muddies the normative argu-ment with specious sociological reasoning, and will lead to policy mistakes(Frazer 1996, p.89).

2 A system where elections are conducted by postal votes, not one where postalvoting is used to supplement voting at polling booths as an aid to those whocannot get to the booth.

3 I would like to acknowledge here some work on the literature concerning com-munity — especially the sociological literature — carried out for me by JohnParkinson, who was employed as my research assistant.

4 This seems to be a key driver in the present Australian Commonwealth gov-ernment’s policy concerning community and is probably not far from thethoughts of many governmental policy-makers or their advisers (see Green1996).

5 There is an interesting relationship, for example, between the literature oncommunity and that on social capital, which also seeks to analyse social con-nectedness, including with regard to civic-mindedness and democracy. Themost well known exponent is Putnam (1993; 2002) whose works have beenwidely influential. A more complex theoretical approach, which may be read aschallenging some of Putnam’s assumptions, is offered by Bourdieu, whoseideas are well expounded in Webb et al. (2002, pp.21–44).

6 This should be compared with the way similar conclusions nevertheless wiselystayed the hand of the Local Government Commission and the Major govern-ment in the U.K. (Lowndes 1996, pp.81–83).

7 Some, myself included, would argue that the bicameral system, in particular theuse of rotated elections for the ‘upper house’, is a check on the democratic prin-ciple. Queensland is the only unicameral state parliament. Nevertheless, in allother respects, the other Australian states and the Commonwealth satisfydemocratic criteria with respect to the franchise.

8 This has been the main argument I have heard when raising this question inlocal government circles.

9 It may also mean that voters are non-Australians living overseas and that thepeople elected do not live in the local area.

10 The Bill to amend the Local Government Act currently before the Victorianparliament proposes to change voter eligibility only by limiting the number ofjoint owners entitled to vote to two, still automatically enrolled, and requiringproperty occupiers to apply for enrolment.

11 I do not accept this case, mainly because of my belief in the importance ofactive citizenship and the need to maintain meaningful political rituals as partof the vital set of linkages between local governments, elected representativesand the people in a municipality.

12 It should be noted that postal voting had been available before universal postalvoting was introduced. Persons who were absent or would otherwise find it dif-ficult to present at a polling booth on election day could apply for a postal vote.


The new public management reforms that have transformed theCommonwealth and state public sectors since the 1980s have also beenapplied to the local government sector, although in varying ways. Thishas generally occurred through public sector-wide reform processes,rather than any specific reform process focused solely on local govern-ment. The extent of management reform in local government has var-ied from state to state because of the constitutional role the states playin establishing local government systems. Some states have taken a top-down approach to reform while other states have tried to work cooper-atively with local government. The Commonwealth has also played amajor role in facilitating local government reform, often working incooperation with the states and with local government. In addition,many authorities have undertaken their own management reforms andthis has contributed to a diversity of outcomes across the sector.

At September 2000 there were 622 councils and an additional 104Aboriginal and Torres Strait Islander councils (DOTARS 2001, p.54).While the main differences in reform are between the larger urbancouncils and smaller rural councils, there are also differences withincouncils. This reflects the fact that different management reforms havebeen applied to different services within local government. For exam-ple, regulatory services such as town planning and building havereceived different treatment compared to reforms targeted at infra-structure services.

A number of individual councils have taken an innovativeapproach to management and been at the leading edge of change inthe public sector. The circumstances of particular councils reflect their

7

M A N A G E M E N T R E F O R M I NL O C A L G O V E R N M E N T

Geoff Baker

environment. Economic, social and environmental pressures, theinterests of key local stakeholders, and the capacity of local govern-ment leaders to initiate and implement change are critical factorsinfluencing organisational outcomes. Declining revenues and chang-ing community expectations have also been catalysts for local initia-tives in management reform (Caulfield and Larsen 2002, p.14). Thediversity of management reform initiatives means that there will beexceptions to any generalisations about reform in local government.Nevertheless, since the late 1980s there have been explicit agendas toapply public sector-wide reform processes to local government,reflecting new public management reforms at state andCommonwealth levels (Aulich 1999, p.13).

The first part of this chapter deals with the role of the states and theCommonwealth, and their approaches to reform. This is followed by ananalysis of the new public management, particularly the application ofcorporate management to local government, the application of nation-al competition policy, and the attempts to integrate efficiency reformswith customer-focused approaches to service delivery.

T O P - D O W N M A N A G E M E N T R E F O R M — T H E R O L E O F T H E S T A T E S A N D T H E

C O M M O N W E A L T H

THE ROLE OF THE STATES

State legislation setting local governance frameworks has been the pri-mary mechanism for applying the new public management reforms tolocal government. All the states developed new local government actsbetween 1989 and 1995 (Aulich, 1999 p.14). At the very least thisremoved some of the legislative barriers holding back change in localgovernment (Aulich 1999, p.12). The wider economic environment hasundoubtedly influenced the approach taken by the states. The threestates that experienced economic crises in the early 1990s because of astructural shift away from their traditional manufacturing base —Victoria, South Australia and Tasmania — have implemented the mostfar-reaching local government reforms (Aulich, 1999 p.20). Victoriahas had the most radical program with amalgamations and the intro-duction of compulsory competitive tendering, while South Australiaand Tasmania have mainly focused on amalgamation. A common themein the reform approaches in these states is the focus on efficiency andcost-cutting.


The three states with the stronger economies during the 1990s —New South Wales, Western Australia and Queensland — have not hadsuch radical reforms. The focus in these states has been on the applica-tion of corporate management and the introduction of new account-ability measures as part of a wider corruption prevention agenda. TheIndependent Commission Against Corruption in New South Wales,and the Crime and Misconduct Commission in Queensland have playedleading roles in setting the agenda in their respective states. These bod-ies have had a significant impact on organisational culture in local gov-ernment. The WA Inc Royal Commission in Western Australia has alsomade a similar impression in that state. In all these three jurisdictionsefficiency-focused reforms came later in the decade with the applicationof national competition policy.

Other state initiatives have indirectly contributed to managementreform in local government. Rural councils in Queensland are agentsfor the state in maintaining state roads. Efficiency reforms in road man-agement required councils to adopt quality assurance and other process-es to improve quality. Efficiency gains of 17 per cent were achievedduring the 1990s (LGAQ 2002, p.16).

A particular issue in some states has been the emergence of localgoverning bodies for Aboriginal and Torres Strait Islander communi-ties. Since the 1970s the states have created 104 new councils for thesecommunities. This has mainly occurred in the Northern Territory andQueensland as part of delegating autonomy to local people (DOTARS2001, p.96). The introduction of local self-government appears to havebeen generally supported by the people living in the affected locations(Perkins 1992, p.27). However, the geographical isolation and smallsize of these communities creates special problems in terms of deliver-ing services efficiently and effectively. State and Commonwealth fund-ing is vital for these councils because they have no ability to levy rates(DOTARS 2001, p.95). Cultural factors will also have an impact on thetake-up of the new public management reforms in such councils. Theisolation of these communities raises additional barriers to the recruit-ment of skilled employees.

LOC AL GOVERNMENT AMALGAMATIONS

Management reform in local government has also occurred as a resultof the drive to achieve efficiency through the amalgamation of councils.In Victoria, South Australia and Tasmania, state governments initiateda dramatic reduction in the number of councils, with economies of scale

M A N A G E M E N T R E F O R M I N L O C A L G O V E R N M E N T • 1 1 9

providing the primary rationale. However, not all amalgamations havebeen driven by this efficiency objective. The amalgamations inQueensland in the 1990s were focused on a small number of largeregional urban centres experiencing rapid population growth. Theobjective was to achieve better management of growth rather than toachieve economies of scale. The Victorian amalgamations proved to bethe most extensive, with the number of councils reduced from 210 to78. They were also accompanied by other efficiency reforms designedto cut costs in service delivery. These reforms are dealt with in detaillater in this chapter.

In Tasmania a major restructuring of local government took placeduring the early 1990s. Amalgamations reduced the number of councilsfrom 46 to 29 (Haward and Zwart 2000, p.34). While factors such ascommunity of interest and representative democracy influenced theprocess, achieving cost reductions through economies of scale was acritical factor (Haward and Zwart 2000, p.40). Scale economies werealso seen as a means of providing resources to employ professionalsacross a wide range of traditional and emerging local government activ-ities, including management (Haward and Zwart 2000, p.36). A furtherattempt to reduce the number of councils from 29 to 14 was initiatedfollowing a joint Commonwealth-State assessment of the Tasmanianeconomy (Haward and Zwart 2000, p.40). These new proposals wereagain based in part on achieving greater efficiency in local governmentthrough capturing economies of scale. However, they were stymied bylegal action and subsequently dropped following a change of govern-ment in 1998. While the amalgamations of the early 1990s had signifi-cant local government support and generated some efficiencies, thelater reform proposals were developed without adequate engagementwith local government to justify the need for further efficiency gains(Haward and Zwart 2000, p.44).

The South Australian restructuring of local government began inthe second half of the 1990s, following the amalgamation programs inTasmania and Victoria. The result was a reduction in the number ofcouncils from 118 to 69. The efficiency gains from the South Australianreforms have been estimated at between $19 million and $33 million,or between 3 and 5 per cent of council expenditure (DOTARS 2001,p.57). The State Government used a cooperative reform process andleft it to councils to decide whether to pass these savings on to ratepay-ers through reduced rates, or to improve the provision of services (SAL-GBRB 1998, p.2). While greater efficiencies resulted from the


amalgamations, this outcome was assisted by the fact that councils hadalready implemented extensive management reforms under the newlocal government legislation introduced in the early 1990s. Thesereforms included the adoption of corporate planning, development ofperformance measures and reporting to the public on performance,adoption of enterprise bargaining, and the introduction of accrualaccounting (LGASA 1995, p.9).

While there have been savings from economies of scale, other ben-efits have included better planning of council activities, greater access toprofessional expertise and a stronger customer focus. However, therewere also disadvantages identified. These included the loss of experi-enced staff through retrenchments, more job insecurity, and a drop inthe number of outside staff, despite the greater geographic areas to beserviced (DOTARS 2001, p.56f). Major reductions in employment donot appear to have resulted from the South Australian amalgamations,with the number of local government employees staying at about 7,900between 1996 and 2001 (DOTARS 2001, p.57).

Amalgamations on their own do not necessarily generate efficien-cies, but can make it easier to achieve efficiency gains if combined withother reforms that provide additional direction. In Tasmania, for exam-ple, the amalgamations were seen as an essential precondition of coun-cils being able to effectively apply the later national competition reforms(NCC 1998, p.11). They can also make it easier to facilitate the cultur-al change needed to effectively implement reform. Amalgamations are acontroversial way to achieve efficiencies; other reform options are avail-able that do not necessarily create the same risks.

THE ROLE OF THE COMMONWEALTH

Since the mid-1980s, the Commonwealth has played a major role infacilitating management reform in local government. While theCommonwealth has no direct legislative control over local government,it has used its financial power to secure the states’ agreement to apply awide range of economic reforms to local authorities, the most impor-tant of which has been national competition policy. Commonwealth ini-tiatives in regulatory reform have also affected local governmentthrough Commonwealth/state agreements, particularly in areas such astown planning and environmental management. Federal agencies alsoworked directly with local government to facilitate reform, in somecases by-passing the states.

The Commonwealth’s jurisdiction over industrial relations matters


has played an indirect but important role in management reform in localgovernment. The introduction of structural efficiency in the late 1980s(with its emphasis on simplifying industrial awards and providing moreflexibility in workplace arrangements) and enterprise bargaining hasremoved some of the institutional rigidities that prevented more effi-cient workplace arrangements being developed in local government(Martin 1997, p.220).

The Commonwealth also used the Local Government Ministers’Conference (LGMC) to explore how specific issues in the local govern-ment labour market could be addressed to contribute to the widernational objectives in this area. The Commonwealth provided theLGMC with funds to run a National Review of Local GovernmentLabour Markets (NRLGLM), which had a major impact on removingstate legislative barriers to management reform in local government.The NRLGLM put pressure on the states to repeal legislation thatestablished statutory positions in local government and which requiredpeople to hold a certificate of competence from the state before beingemployed in such positions.

This system was a major barrier to management reform in local gov-ernment and provided protection to key professions such as engineer-ing, town planning and public health. It also required councils toemploy a state-certified town or shire clerk as the senior administrativeofficer in a council. The problem with the regulated system was that itcreated a closed culture that emphasised the differences rather than thesimilarities between local government management and managementelsewhere in the public sector (NRLGLM 1998, p.39f). The initialresponse from the states was slow, because the various professional bod-ies saw this as a threat to their members and opposed the changes. Ittook a number of years for the states to repeal requirements for statu-tory positions in local government, along with the accompanying certi-fication requirements.

The Commonwealth’s training initiatives over the past decade havealso played a role in helping employees to adapt to a new operating envi-ronment. The Commonwealth funds the National Local GovernmentTraining Board to assess the training needs of the local governmentworkforce, in conjunction with Commonwealth funded bodies operat-ing at state level. A key element of the training focus is on skills devel-opment for local government management (DOTARS 2001, p.15).

The other role the Commonwealth has played has been to overcome problems with innovation diffusion in local government by


establishing national innovation awards that have helped to advancemanagement reform (DOTARS 2001, p.68). In addition, since themid-1980s, the Commonwealth has funded projects and initiativesdesigned to provide examples of best practice in local government(Aulich et al. 1991, p.122). This has covered management reform aswell as projects designed to facilitate local government’s contribution tonational objectives in relation to economic development and environ-mental management. While the funds involved are relatively small(about four million dollars per annum), they have been targeted at smallto medium sized councils to overcome some of the organisational andcultural barriers to reform (DOTARS 2001, p.68).

A further area in which the Commonwealth has been involved hasbeen the provision of about $1.3 million to South Australia, Tasmania,Western Australia and New South Wales to facilitate structural reform.This has included consideration of council amalgamations (DOTARS2001, p.53). Finally, Commonwealth funding has also been used tofacilitate the introduction of electronic service delivery and electroniccommerce to local government, with $45 million allocated through theNetworking the Nation program over five years from 1998–99(DOTARS 2001, p.67).

The Federal Government has not always taken such a cooperativeapproach. It has used its role in the provision of financial assistancegrants to local government as a means of promoting greater efficien-cy in local government operations. In the mid-1990s theCommonwealth undertook a review of the Local Government(Financial Assistance) Act 1986, with the aim of incorporating effi-ciency principles alongside horizontal fiscal equalisation as the basisfor distributing general purpose grants among councils. This met withstrong resistance from the states, with the result that a cooperativeapproach was adopted in relation to the development of performancemeasures of local government efficiency and effectiveness across thefull range of local government services (DOTARS 2001, p.62). TheCommonwealth has also provided funds to facilitate the developmentof performance measures.

Overall, management reform in local government would not havehappened to the same extent without the involvement of theCommonwealth. While there are constitutional limits to its role, itsfinancial power and its willingness to work cooperatively with the statesand local government have enabled it to influence the scope and paceof reform.


L O C A L G O V E R N M E N T A N D T H E N E W P U B L I C M A N A G E M E N T

Prior to the reforms of the 1990s, local government broadly reflectedthe legal-rational model of bureaucracy. This involved a focus onprocess and inputs rather than outcomes, hierarchical structures, pro-motion on seniority rather than merit, the exercise of authority basedon the holding of an office, and specialisation of labour (Albrow 1970,p.44f). As in the Commonwealth and state public sectors, the sectorembraced the conventional notion of a separation between politics andadministration (Hughes 1992, p.288). Parts of the local governmentbureaucracy reflected Mintzberg’s concept of a professional bureaucra-cy, with reliance on specialised professional expertise in decision-makingand service delivery. Other parts reflected Mintzberg’s machine bureau-cracy, based on a specialisation of tasks and standardised operating pro-cedures (Stewart and Kimber 1996, p.39).

Management in local government reflected the dominant paradigmdescribed in the Karpin Report on management in Australia (1995,p.21), with a focus on organisational discipline rather than organisa-tional learning. It also included inflexible structures, hierarchies ratherthan networks, disempowered employees and strategic learning at theapex rather than spread throughout the organisation. In addition, therewas a strong organisational culture supported by the power of profes-sional institutions and the associated state certification systems.Departments were structured with a product or production orientation,rather than having a customer or marketing perspective. To a consider-able extent councils were closed entities, with limited mobility from theprivate sector or other parts of the public sector. Movement between anauthority’s divisions and departments was similarly constricted becauseof the strong professional affiliations of the personnel involved. Seniormanagement was based on technical expertise rather than generalistmanagement skills. Very few senior executives from professions such astown planning, engineering or environmental health were appointed tothe town/shire clerk position prior to deregulation of statutory posi-tions. State legislation on statutory positions provided the legal frame-work with which to limit mobility. It also acted as a barrier to women,people from non-English speaking backgrounds, and Aborigines andTorres Strait Islanders in local government employment.

Despite these constraints, town and shire clerks had opportunitiesto provide leadership rather than focus on compliance with establishedprocedures. This was particularly the case in the 1950s and 1960s,


where there were opportunities to expand the provision of local infra-structure — often supported by state funding as part of post-war eco-nomic growth. This local leadership sometimes overcame the problemof unresponsiveness characteristic of traditional local governmentbureaucracy. The traditional model, and the state legislation that sup-ported it, also helped reduce the risk of nepotism in local governmentemployment and corruption in financial management. However, the‘closed shop’ and the barriers to responsiveness it created meant thatchange in the longer term was inevitable.

Similar issues had begun to be addressed in the state andCommonwealth public sectors with the application of the new publicmanagement. This began at the Commonwealth level in the 1970s, fol-lowing the Royal Commission on Australian GovernmentAdministration. However, the pace of change in the public sector quick-ened in the early 1980s (as part of reforms to open up the Australianeconomy) following the publication of the White paper, Reforming theAustralian Public Service (Stewart and Kimber 1996, p.41).

The new public management at this stage was about corporate man-agement: an emphasis on management by objectives, a focus on outputsrather than inputs, corporate planning, devolution of operational auton-omy to business units run by generalist managers, and the use of per-formance measurement to hold managers accountable (Considine1988, p.5). It also had a strong outcomes focus rather than a concernwith legal process. The model was derived from the private sector,where it had become the dominant approach utilised by diversified firms(Alford 1993, p.142). It began to be applied to the state public sectorsin the 1980s.

A key element of corporate management was the role of the gener-al manager, with a primary focus on management skills rather than pro-fessional technical expertise in a particular discipline such as engineeringor town planning. This aspect of corporate management had beenadopted in the Commonwealth public sector through the introductionof the Senior Executive Service in 1984, with the states subsequentlyfollowing the lead. It enabled generalist managers to be moved acrossthe public sector, working in management in organisations where theperson may not have had a professional background (Stewart andKimber 1996, p.41). It was an approach that proved difficult to applyin local government because even though municipalities are multi-pur-pose organisations, most were too small and had insufficient resourcesto enable this strategy to work. The amalgamations in Tasmania and


South Australia were driven in part by the need to remove these barri-ers. In fact, local government generally did not pick up the corporatemanagement reforms that occurred in the Commonwealth and statepublic sectors in the 1980s, because the states’ local government legis-lation was a major obstacle to enabling councils to operate within thisframework (NRLGLM 1998, p.vif).

The states not only removed these barriers as an initial step, but alsoexplicitly incorporated corporate management reforms in the develop-ment of their new local government acts. While the larger urban coun-cils were ready to take the opportunities that legislative reformprovided, there were concerns from smaller rural councils that the cor-porate management approach was not appropriate in a stable rural con-text where councils had a small number of staff and undertook a limitedrange of services.

CORPORATE MANAGEMENT REFORMS

The introduction of corporate management to local governmentthrough new state legislation was structured around corporate plan-ning, financial management and performance reporting (Aulich 1999,p.13). While councils had always been required to prepare annual bud-gets, there was no coordinated long-term strategy to guide resourceallocation. Budgeting was an incremental process with resources allo-cated on the basis of the previous year’s allocation to line items, with anadjustment at the margin. Corporate management was concerned withallocating resources to achieve long-term objectives. In theCommonwealth and state public sectors, this was achieved through theintroduction in the 1980s of program management and budgeting,with corporate plans used to set objectives to guide resource allocation(Stewart and Kimber 1996, p.41).

Program management and budgeting involves allocating resourcesto achieve objectives over multiple financial years. It contrasts with tra-ditional line-item budgeting, which is concerned with controllingexpenditure in a financial year to fit within defined limits. The intro-duction of corporate planning and program budgeting usually resultedin organisational restructuring, with a shift away from input and pro-fessionally based structures to structures based on programs. Theapproach taken in state legislation was to require councils to develop aplan to set out long-term objectives for the community. This in turn wasto be used as the basis for allocating resources through the annual bud-get. Councils would then report on performance in achieving those


objectives through an annual report. State legislative provisions alsorequired councils to establish a corporate structure. With the abolitionof statutory positions, councils were provided with the opportunity toshift from profession-based structures to structures based on outputs orprograms, and even structures with a customer or marketing orienta-tion. It also provided scope to increase staff mobility between adminis-trative units within a council, using the flexibility that industrialrelations reform provided to break free of some of the barriers to joband workplace redesign. Despite the thrust of state legislation, it stilldepended on the initiative of individual councils to take advantage ofderegulation to reform their organisations. Such a development tendedto occur in councils where the mayor and the chief executive officer(and in some cases the senior executive team) were well positioned toprovide leadership.

Scope to exercise such leadership was provided by a further key ele-ment underpinning the legislative reforms. This involved replacing thetraditional town/shire clerk with a new position, which was responsiblefor injecting corporate direction into council management. Operationalauthority was devolved to output or program based administrativeunits. The new role was intended to be similar to that of the chief exec-utive officer in companies established under corporations legislation.The creation of this new position, in turn, required the states to choosewhether to legislate to transform existing town/shire clerks into CEOs,or to allow councils to undertake an entirely fresh appointment process.New South Wales chose to open the position up, while Queenslandtook a more conservative approach of legislating to transfer existingtown/shire clerks.

Despite the different approaches, the practical outcome in moststates was that there was significant turnover (in the first two years in par-ticular) after the creation of the new chief executive positions. In NewSouth Wales there was a 40 per cent turnover of general managers in theperiod 1995–98 (Marshall and Sproats 2002, p.53). The situation inQueensland was similar. There were new chief executives appointed in60 of the State’s 125 local governments over the five years following theintroduction of the revised Local Government Act of 1993 (LGAQ2002, p.19). Clearly, the new sets of skills involved meant that not allexisting town/shire clerks were suited to this role.

When combined with deregulation, the redesignated position pro-vided councils with an opportunity to recruit a new chief executive fromoutside local government. In practice few such people came in from the


private sector, though there were recruits from state andCommonwealth agencies. Research undertaken by Gerritsen andWhyard (1998, p.12) estimates that about 40 per cent of the new chiefexecutive officers began their careers in local government, with the restcoming from outside the sector. There was some recruitment of localgovernment engineers into the new chief executive role, but this prac-tice was not extensive. In addition, there was limited recruitment oflocal government professionals from other backgrounds such as townplanning. Very few women were appointed to the new chief executiverole. Gerritsen and Whyard estimate that by 1998 only four per cent ofchief executives were women, with most of these from a human servicesbackground (1998, p.7).

Some states also used legislative reform to introduce requirementsfor time-limited performance based contracts for senior executives. Thishelped with the cultural shift for senior executives to move from a focuson compliance to a focus on results, as well as providing leadership toachieve objectives set through council corporate plans. A related aspectof the reforms was to shift the role of councillors to a strategic focus onsetting objectives rather than focusing on the detail of implementation.However, this meant councils would need to develop systems to mea-sure performance so that management could be held accountable fortheir effectiveness in implementing council strategies.

It was mainly urban councils which took the opportunity to adjustfrom profession-based structures to program structures. A study byKluvers of Victorian local government in 1993 (prior to the KennettGovernment reforms) found that program planning and budgeting hadbeen introduced by 41 per cent of metropolitan but only 22 per cent ofnon-metropolitan councils (Kluvers 1999, p.72f). Kluvers also foundthat the introduction of program planning and budgeting was stronglysupported by local government management (1999, p.75). Managersrecommended its adoption in 79 per cent of cases, compared with only10 per cent of cases where the initiative came from the councillors, and15 per cent where the initiative came from external sources. However,there was only a limited shift from professionals in senior executive posi-tions (appointed on the basis of technical expertise) to general man-agers. In addition, there was also restricted mobility betweenadministrative units. As a consequence, the professions maintained theirdominance in the new corporate structures. The major changes in thisarea were to come later with the more targeted microeconomic reforms.

The introduction of corporate management was accompanied by


the reform of employment practices. The merit principle was intro-duced, along with the application of equal employment opportunitylegislation, to bring local government into line with the rest of the pub-lic sector (Gerritsen and Whyard 1998, p.8). Anti-discrimination lawwas introduced into the local government arena at the same time it wasapplied to the private sector and the rest of the public sector. The cul-tural change in organisations that the new employment practicesrequired was facilitated by the Commonwealth, the states and the localgovernment peak bodies. In relation to equal employment opportunity,the Commonwealth has provided funding to help increase the employ-ment of Aborigines and Torres Strait Islanders in local government(DTRS 2001, p.93). The Commonwealth has also played a role in help-ing to increase the number of women in senior management in localgovernment (DTRS 2001, p.107).

While the most progressive councils embraced these reforms andused them to create new corporate cultures and improve efficiency andeffectiveness, the extent of the shift across the sector as a whole was lim-ited. Leadership within local government varied in its response to thereforms. Despite support from peak associations, the pace of change wasslow. The capacity of councils to implement reforms was also seen as amajor barrier; for example, a criticism of the New South Wales legisla-tion was that many councils were too small to deal with the level ofsophistication required to develop meaningful objectives and strategiesfor their management plans (Marshall and Sproats 2002, p.53).

It was not until economic pressures increased that a more directedand heightened reform effort within councils eventuated. This wasespecially in the case of Victoria. Amalgamations and legislative changeintroducing corporate management did not of themselves generate sig-nificant shifts in local government efficiency. The focus of reform hadto shift to internal financial matters before significant efficiency gainswere achieved (Jones 1991, p.11). In Aulich’s view, there was conver-gence between the states during this first legislative phase of the reformsin the 1990s, but the second wave, with its stronger emphasis on effi-ciency, led to divergence (Aulich 1999, p.16).

EFF IC IENCY REFORMS — THE V ICTORIAN EXPER IENCE

The process of major restructuring of the Australian economy began inthe 1980s as a response to changes in the international economy. At theCommonwealth level there was bipartisan recognition that microeco-nomic reform was needed to enable the Australian economy to make


the transition away from unsustainable industries supported by govern-ment regulation and protectionist policies to an economy that was ableto grow in response to the global environment. Economic restructuringwas to have varying regional impacts in Australia. New South Wales,Western Australia and Queensland benefited from an expansion of themining and resources sectors. By contrast, the three States that hadrelied heavily on protected manufacturing (Victoria, South Australiaand Tasmania) experienced economic crises in the late 1980s and early1990s. As a consequence, their economic base went through a sharpstructural decline (Aulich 1999, p.20).

The newly elected Kennett Government in Victoria in 1992embarked on a process of radical reforms, using the economic crisis as jus-tification. These reforms reflected a fresh phase in the development of thenew public management, with privatisation of government services,deregulation and a reduction in taxation to provide incentives for expan-sion of private sector investment (Sturgess 1996, p.60). It was anapproach that was based on the policies implemented by the ThatcherGovernment in the United Kingdom. The United Kingdom reforms hadincluded privatisation of utilities, contracting out of service delivery to theprivate sector, and the use of purchaser/provider arrangements to achievea quasi-market structure. They also attempted to reduce recurrent expen-diture by a range of means (Rhodes 1997, pp.44–46). Agency theory wasan important part of the theoretical basis for these reforms (Ryan 1997,p.157). In this context it suggests that asymmetric information can arisebetween the council as principal, and council employees as agents,because of different attitudes to risk, and differences in motivation. Thissituation can lead to moral hazard. One way to address the problem isthrough the use of contracts (Milgrom and Roberts 1992, p.167f).

While local government is only a small part of the Victorian publicsector, it was nevertheless viewed as a critical dimension of the widerreform process. One of the architects of the reforms was Des Moore,who developed a detailed blueprint for the local government sector. Hisplan was subsequently funded by the private sector and adopted by theVictorian Government in 1993 (Moore 1996, p.1). The reforms weredesigned to achieve a 20 per cent reduction in the cost of providinglocal government services. Efficiency data showed that Victorian localgovernment had current expenditure per capita that was about 23 percent higher than the average for local government across all the states,with local government taxation about 12 per cent higher per capita(Moore 1996, p.2).


The mechanisms used to reduce costs were achieving economiesof scale through the amalgamation of councils, and the introductionof compulsory competitive tendering (CCT). Up to 50 per cent ofcouncil expenditure was to be put out to competitive tender. CCTrequired councils to introduce purchaser/provider arrangements(State Government of Victoria 1996, p.25). Time-limited perfor-mance contracts were also to be introduced for senior municipal exec-utives. Rates were cut by 20 per cent in order to provide a tangibleand immediate benefit to ratepayers, and to compensate for the dis-ruption caused by the reforms (Moore 1996, p.1). The overall goalwas a more efficient local government sector operating with modernmanagement practices (Digby 2002, p.2). Amalgamation of councilswas achieved by dismissing the sitting councils, reducing the numberof councils from 210 to 78, and appointing commissioners to run thenew entities. The commissioners were also responsible for appointingnew chief executives for the 78 new councils. CCT was implementedin the meantime.

While the economies of scale that resulted from amalgamationenabled a corporate management approach to be more effectivelyimplemented, the other reforms dramatically increased the pressure onthe system of local government to achieve efficiency gains. This processreflected the trend in the private sector where a shift in managementfocus to shareholder value was leading to cost cutting and significantdownsizing, often accompanied by a move away from vertical integra-tion to vertical fragmentation. The CCT reforms were openly recog-nised as the reform element that would have the most impact onimproving efficiency in local government (Hallam 1995, p.9).

The primary objective for management in the reforms was toachieve efficiency in service provision by cutting costs rather than byadopting a more strategic business approach (Martin 1999, p.29). Inmany respects this ran counter to the corporate management reforms,which were based on the management by objectives approach.

The implementation of the Victorian reforms, however, was accom-panied by a number of difficulties. Though some new chief executivesmay have had private sector experience, chief executives and senior man-agers with a background in local government had limited familiarity withmanaging an extensive process of contracting out (Martin 1999, p.28).Consequently, senior executives gave priority to introducing CCT withas few problems as possible, as opposed to adopting a strategic businessapproach (Martin 1999, p.28). Compliance with CCT requirements


overrode a focus on achieving better outcomes. There were also mixedresults from the reforms in relation to organisational culture and perfor-mance. Martin (1999) undertook a survey of local government employ-ees in 1997 to assess perceptions of organisational culture in localgovernment during the reform process. He found that employees viewedthe reforms as emphasising planning, leadership and job performance,but failed to address communication, structure and socialisation of entryto local government for new employees (1999 p.30).

The organisational downsizing that resulted from the Victorianreforms proved unsustainable in the medium to long term. For exam-ple, while employment dropped during the reform process in 1999,by 2001 it had risen again (DOTAR 2001, p.54). The 20 per centacross-the-board reduction in rates was also unsustainable, as shownby the Government’s decision to bring in rate capping when electedlocal government was restored. The savings could not be achievedwithout a reduction in services to the public. The restoration of elect-ed local government led to pressure to increase rates to finance localpublic services.

The blanket application of CCT was poorly targeted. Purchasingdecisions need to be based on an assessment of the costs and benefits ofusing the market rather than relying on an in-house provider (Besankoet al. 2000, p.112). Efficiency gains are unlikely to result from publicenterprises contracting out activities that would normally be undertak-en in-house by private sector firms carrying on a similar business(Quiggin 1996, p.179). Even Moore, as an architect of the reforms, hasargued it would have been more effective for the Government to focuson contracting out particular types of services rather than a proportionof the expenditure involved (Moore 1996, p.5). CCT was subsequent-ly replaced by a new framework of Best Value Principles, which providescouncils with flexibility to assess on a case by case basis the costs andbenefits of contracting out (DTRS 2001, p.240).

Aulich suggests the Victorian exercise reflects a structural efficiencymodel of reform where local government’s role is focused on servicedelivery rather than incorporating a broader public policy role (1999,p.19). Local government’s function should be much more that deliver-ing services. It should also involve a governance role in the communi-ty. Such a role is essential in a deregulated environment whereglobalisation can have powerful effects on local economies. Local gov-ernment in this context needs to maximise opportunities, and mitigatenegative impacts if communities are to be sustainable.


EFF IC IENCY REFORMS — NAT IONAL COMPET IT ION POL ICY

While the Victorian Government chose this particular path to reform,other states pursued a different approach, which was driven by theCommonwealth. This direction came in the form of the NationalCompetition Policy (NCP) reforms introduced by the Commonwealthas part of its economic restructuring package. They provided an alter-native to the Victorian strategy in so far as extensive cost cutting was notrequired. Rather, managers were encouraged to develop a commercialoutlook that embraced broader public policy objectives, as well asaccommodating community service obligations.

NCP reflected the international trend away from government regu-lation of the economy to the use of competition to achieve efficiency(Felmingham and Page 1996, p.27). The NCP reforms did not requirea reduction in the size and role of government, as had occurred in otherjurisdictions. Nor did they require privatisation, or that public servicesbe contracted out. The primary focus of NCP was on how to maximisethe use of competition (or to find substitutes for competition) to max-imise allocative efficiency (Felmingham and Page 1996, p.27). Thereforms were adopted by both the Commonwealth and the states inApril 1995.

As signatories to the NCP Agreements, implementation of the pol-icy (including its application to local government) is a requirement ifthe states are to be eligible for competition payments from theCommonwealth. However, the NCP Agreements provided each statewith discretion to decide how various elements would be applied tolocal government. The key element in this respect that has had thegreatest impact on management reform in local government is compet-itive neutrality. Competitive neutrality requires that government busi-ness activities should not have advantages or disadvantages that arisepurely because of their public ownership. For government businessactivities that are monopolies, the application of competitive neutralityessentially means operating the business on a commercial basis.

Three options have emerged for applying competitive neutrality tolocal government business activities: full cost pricing, commercialisa-tion, or corporatisation. Full cost pricing means setting prices to coverthe full cost of operating a business activity, including tax equivalentswhere the business activity is exempt from taxes by virtue of its publicownership. Commercialisation comprises setting up the business activi-ty as a commercial business unit within the council, providing it with acommercial objective and applying full cost pricing. Corporatisation


involves setting up a business activity as a separate legal entity with aboard of directors and a commercial objective. The council would havethe role of shareholder.

The NCP Agreements required that competitive neutrality shouldbe mainly applied to significant business activities. However, theAgreement does not define what is significant. Each state had to decidewhere to draw the line between significant and other business activities.

THE STATES ’ APPROACH

The Victorian Government took the view that its reform program large-ly achieved the objectives of NCP, even though it used mechanismssuch as CCT that the Hilmer Committee did not specifically endorse(State Government of Victoria 1996, p.11). Queensland, on the otherhand, was one of the first states to develop a framework for applicationof competitive neutrality to local government because of the consider-able size of council business activities such as water and sewerage. Thisinitiative established the model for other states to follow. TheQueensland approach to NCP was to use the reforms not to rationaliselocal government services and cut costs but to modernise the manage-ment of local government services through a commercial focus that alsoallows councils to pursue public policy objectives.

A common misconception among local government unions in theearly stages of the NCP reform process was that authorities would have tointroduce CCT (as in Victoria) or privatise their services. Councils wereafraid that it would result in a Victorian style reform process. Once itbecame clear that this was not the case, local governments were general-ly supportive of this approach to the implementation of the NCP reforms.

The strategy in Queensland was to focus reform on the largest coun-cils with significant business activities (Queensland Government 1996).The state also decided to pass on to local government up to $150 mil-lion of Queensland’s potential competition payments from theCommonwealth. This was designed to encourage all councils to partici-pate in the reform process. There have been 18 councils with significantbusiness activities targeted by the state (Trembath 2002, p.45). Most ofthe business activities involve water, sewerage, or garbage services. Theyaccount for a very high proportion (around 80 per cent) of overall localgovernment business activity expenditure in Queensland. By focusingreform on the larger local governments, those areas with the most poten-tial for gain were captured. At the same time, opposition from the small-er local governments (where potential gains to the overall economy are


least) was avoided. All the 18 councils decided to apply competitive neu-trality through either commercialisation or full cost pricing.

The State Government further decided to direct all councils to con-sider reforming business activities that competed directly with the pri-vate sector, but were too small to be treated as significant businessactivities. Councils were required to identify if they had any businessactivities of this kind and to decide whether or not to apply full costpricing. Councils that reformed these activities have received a share ofthe competition payments. While the application of competitive neu-trality was intended to ensure that a commercial objective was set forbusiness activities, the framework took account of legitimate public pol-icy objectives that councils might also want to pursue. However, thiswas to be done through a transparent process of applying communityservice obligations.

All but a very small number of Queensland’s 125 councils indicat-ed their intention to reform their business activities. Some councils havealso decided to reform their other services where there is no externalpaying customer (roadworks for example). This has been achieved bythe introduction of a purchaser/provider arrangement, where the coun-cil is the purchaser of services (such as roadworks) and a separate unitwithin the council is the provider. This has enabled councils to addressthe inefficiencies that were the focus of the Victorian CCT reforms,without necessarily engaging in the same cost cutting and reduction inthe labour force.

There were related reforms of regulatory regimes administered bylocal government that complemented the reform of business activities— town planning, building, environmental management and, to a less-er extent health, have changed the roles of these professions in localgovernment management structures. The trend is towards integratingregulatory professionals in one administrative unit, with town plannersoften emerging in dominant roles because of the growing significanceof town planning as a regulatory function.

While the reform process has not involved concentrated costs forsome stakeholders — as occurred in Victoria — it also has not generat-ed the same kind of significant benefits that the Victorian process wasable to deliver. At the least it has helped to change organisational cul-ture in local government by injecting a stronger commercial focus. Atbest it has enabled senior managers to adopt a strategic business per-spective that utilises the same economic, financial and performancemanagement tools of leading-edge private sector firms.


While councils have been forced by the states to apply reforms, thepace of the process has varied. In Queensland, only an additional 16councils beyond the 18 targeted by the state had reformed their busi-ness activities by 2001 — four years after the reform process com-menced. This is despite the fact that councils in Queensland have accessto competition payments for applying the reforms (Trembath 2002p.45). The NCP reforms occurred over a longer time frame than theVictorian reforms. While this has the benefit of making the changesmore sustainable, there is the risk that the process is too slow to effec-tively change organisational culture.

INTEGRAT ING EFF IC IENCY REFORMS WITH

A PUBL IC POL ICY ROLE

Despite pressure to pursue efficiency reforms in local government, theCommonwealth has acknowledged that a key issue facing local govern-ment is whether it is primarily a deliverer of services, or whether it alsohas a broader public policy role (DTRS 2001, p.111). Aulich (1999)has suggested that the structural efficiency model of reform (imple-mented through CCT and NCP) has been at the expense of a localdemocracy model. This latter model emphasises local democratic prin-ciples such as responsiveness, accountability to the local community andadvocacy on behalf of the local community; reform is a political ratherthan a technocratic process (Aulich 1999, p.19). The structural effi-ciency model, on the other hand, is concerned with the efficient deliv-ery of services to consumers, which may be at the expense of legitimatepublic policy objectives designed to benefit citizens rather than con-sumers (Aulich 1999, p.19).

The reform process in Brisbane City Council (BCC) is an exampleof how councils can integrate Aulich’s structural efficiency and localdemocracy reform models. The BCC reforms draw on the new publicmanagement model developed by Osborne and Gaebler (1992), whichinvolves integration of public and private management concepts. Itretains the emphasis on citizens and the legitimate role of governmentin pursuing public policy objectives, but uses private sector manage-ment practices to achieve them. BCC is the largest local government inAustralia and, as the local government with the most extensive range ofbusiness activities, has been at the forefront of applying competitiveneutrality. BCC combined the NCP reforms with a purchaser/providerarrangement, a new focus on service delivery, and the use of technolo-gy to improve the quality of customer services whilst at the same time


improving efficiency. It also involved using marketing technology tofocus on customers and community participation techniques to addressgovernance issues. Though this has involved a reduction in its work-force from about 7000 in the mid-1990s to about 5500 today, theprocess has occurred through an orderly process negotiated with therelevant unions. The restructuring went beyond cutting costs; itinvolved reskilling, and changing the organisational culture from aproduct orientation to a customer orientation. New technologies havealso created opportunities to reduce costs. They are transforming theway business is done and services are delivered, creating new opportu-nities for dramatic improvements in the quality of services.

BCC provides an example of what councils can do on their own ini-tiative, combining top-down reforms that are not overly prescriptivewith strong local leadership to maximise efficiency gains but alsoachieve local public policy objectives. It used its size to negotiate a part-nership relationship with the state and is committed to working region-ally with other councils.

C O N C L U S I O N

Sector-wide reforms initiated by the Commonwealth or the states areblunt instruments. The strength of local government is its responsive-ness to its immediate context. Top-down reforms can lead to negativeoutcomes if they do not allow councils to respond to their environment.On the other hand, these processes can break the capture of local gov-ernment by interest groups or agents. Aulich argues the states will con-tinue to struggle with their current approaches to local governmentreform (Aulich 1999, p.21f), and suggests that the environment formanagement reform in local government will remain dynamic for sometime to come.

While it is possible that local government reform could disappear offthe states’ policy agenda — as happened for long periods in the twenti-eth century — this seems unlikely. Local authorities offer benefits tostate governments, with opportunities to use partnership relationshipsto deliver state services through local government more efficiently thanthe state can do itself. This role is expanding as the states recognise thecontribution local government can make in addressing emerging issues,such as natural resource management and crime prevention. TheCommonwealth has also recognised the potential role local governmentcan play in addressing issues of national significance.


Achieving sustainable benefits from reform may also depend on thecapacity of leaders to manage the process. Martin’s assessment of theVictorian reforms is that while senior management is crucial to effectiveorganisational change, many senior local government managers have notbeen able to provide strategic direction through the change process, focus-ing more on regulatory compliance rather than on achieving outcomes.This exacerbates conflict in the change process (Martin 1999, p.34).

Developments in the wider economic environment will also be a keydeterminant of future reform initiatives. Local government structuresprior to the 1990s reflected the dominant multi-divisional form used inthe private sector until the 1960s. This was based on economies of scale,particularly through the utilisation of new technology. Over the past 40years, however, the private sector has moved away from hierarchicalstructures to less vertically integrated organisational forms. The role ofmanagers has shifted from exercising control over resources to respon-siveness to the market. Reduction in transport and communicationcosts has reduced risks in coordinating the factors of production.Efficiency gains have increasingly come from vertical fragmentation ofproduction. Consequently, future efficiency-focused reforms in localgovernment may be driven less by top-down public sector reformprocesses than by developments in the competitive markets in whichlocal governments operate. As Martin has argued, this will mean thatsenior executives in local government will need to develop new skills.Such skills will encompass understanding core business, identifyingmarkets and developing competitive strategy, aligning organisationaldesign with business strategy and fostering a performance managementapproach to managing human resources (Martin 1999, p.33).

This situation does not mean the Commonwealth and the states willnot initiate local government reforms, but it suggests they are morelikely to be driven by public policy issues other than efficiency. The useof transparency and other organisational systems to prevent corruptionis a significant emerging issue in the context of a globalised economy. Itwill be critical in this environment to maintain public and investor con-fidence in the integrity of government, including local government. Aswith the top-down efficiency reforms, any future reforms will need tobe based on a cooperative relationship with local government, if theyare to be effectively implemented.


During the 1980s the respective functions of elected members andappointed officials became an increasingly problematic issue across theAustralian local government sector. The expected roles and responsibil-ities attached to each group were vague in intent and often not adheredto. This situation had significant implications for the quality of localgovernance. Senior managers who exercised too much influence weak-ened the democratic legitimacy of the decision-making process, whilecouncillors who interfered too readily in the details of administrationundermined the overall efficiency of the organisation. Ongoing powerstruggles between councillors and management, and within the man-agement arm itself, tended to exacerbate both problems.

All six states sought to resolve this issue in the course of the 1990sby introducing revised local government legislation that was intendedto clarify the roles and functions of councillors and senior management.A decade or so after this legislation was introduced, however, the defi-nition of roles and responsibilities continues to be a contentious matterfor a number of councils. Uncertainty and misunderstanding aboutduties, or refusal to adhere to expectations, can lead to disagreementand conflict within authorities, and reduced operational effectiveness.In extreme forms they can result in corrupt behaviour and dysfunction-al municipalities.

The purpose of this chapter is to explore the roles and responsibili-ties of elected members and chief executives as they have emerged in thewake of the states’ revised local government legislation. It does so interms of a corporate governance perspective. The notion of ‘corporategovernance’, until recently, has largely been confined to private sector

8

THE ROLES AND RESPONS IB I L I T I ESOF CH I E F EXECUT IVE OFF ICERS

AND COUNCILLORS IN AUSTRAL IAN LOCAL

GOVERNMENT: A CORPORATEGOVERNANCE PERSPECT IVE

Neil Marshall

usage. It describes the fundamental principles, operational structures,and desirable codes of conduct that should underpin and drive respon-sible company management. By the early 2000s the concept had alsocome to be strongly embraced by public organisations in Australia.Though the term has been less widely used in relation to the local gov-ernment sector, the argument here is that it does have particular rele-vance to the operation of councils

The following discussion looks first at the meaning of corporategovernance as it has evolved in the business context, and the manner inwhich it has since been applied in the public domain. This provides thebroader framework for the analysis of the local government arena. Thebackground to the local government reform legislation of the 1990s isconsidered, along with the intention of the acts in terms of the roles andresponsibilities of elected members and management. The organisa-tional environment in which councillors and chief executive officers(CEOs) function and interact is then assessed in some detail. Theremainder of the discussion provides some suggestions as to how theadoption of a corporate governance perspective might enhance the per-formance of the sector as a whole.

T H E C O N T E X T O F C O R P O R A T E G O V E R N A N C E

The term ‘corporate governance’ only became widely used during thelate 1980s following the collapse of a number of major businesses acrossAnglo-based economies. In the United Kingdom the CadburyCommittee was appointed to make recommendations on how toimprove the governance of companies with a view to reducing the inci-dence of failure. The Committee, which reported in 1992, defined cor-porate governance simply as ‘the system by which companies aredirected and controlled’ (Cadbury 1992, para.2.5). Central to the suc-cess of this system is the board of directors who determine the strategicdirection of the organisation, supervise the implementation of policy bythe executive, and provide accurate reporting on outcomes to share-holders. Effective governance by the board depends upon ensuring thatpower is dispersed within the organisation through appropriate checksand balances. These include such measures as the separation of execu-tive and non-executive functions; a clear definition of the roles and rela-tionships involved; and the election of genuinely independentnon-executive directors to provide objectivity and expertise in policy


development and supervision. A further mechanism critical to the pro-motion of sound governance is the creation of structures and proce-dures for internal auditing and financial reporting. As a whole, thesystem must be informed by the values of integrity, openness andaccountability. From Cadbury’s perspective, a commitment to genuinetransparency of a company’s activities is indicative of capable and pur-poseful leadership. Confident leadership, in turn, stems from a clearunderstanding of individual functions and a willingness to acceptresponsibility for decisions made.

Though Cadbury’s recommendations have been refined andexpended upon by other committees of inquiry over the last decade, inparticular the Hampel Committee of 1998, the Report neverthelesscontinues to stand as the international benchmark on the subject.

T H E P U B L I C S E C T O R

The contents of the Cadbury report drew the attention of public sectorreformers in Australia as well as the United Kingdom during the late1990s. The concept of corporate governance was seen as increasinglyrelevant to an arena where the traditional forms of public sector activi-ty were in decline and being replaced by such procedures as contesta-bility, outsourcing, and an emphasis on commercial managementpractices. Moreover, this structural change was accompanied by grow-ing intolerance on the part of the electorate at instances of mismanage-ment and fraud from public servants and members of parliament(Hodges et al. 1996, p.9; Barrett 2001).

The private sector framework established by Cadbury, however,could not simply be relocated to the public domain. Certainly, there aresome obvious institutional similarities between governments and com-panies shareholders may be equated with constituents, boards of direc-tors with legislatures, and executive officers with public servants(Bottomley 1997, p.296). The notion of the separation of powers isalso shared between the two.

Yet there are obvious differences. In companies, voting power is nor-mally attached to the proportion of shares rather than the individual, andmembership is optional and changing. Citizenship, on the other hand, iscompulsory and permanent. Governments must also take into accountthe range of concerns of all constituents, not just the financial interestsof a few. In addition, public sector agencies operate in a policy arenawhere aims and objectives are the result of political choices and are often

R O L E S A N D R E S P O N S I B I L I T I E S O F C E O S A N D C O U N C I L L O R S • 1 4 1

multifaceted in nature. For companies, the single overriding goal is long-term profitability. A further issue is that the outputs produced by gov-ernment agencies are frequently qualitative and may be difficult tomeasure. The financial returns generated by commercial businesses, bycontrast, are relatively easy to identify. Finally, public sector bodies arerequired to treat all clients impartially and equitably; values that receivemuch less emphasis in the commercial world.

Despite these differences, there has been widespread agreementamong practitioners in the United Kingdom and Australia that theunderlying principles of corporate governance can, and should, beadapted for use in the public arena. There appears to be a general con-sensus that the essence of these principles involves establishing soundstrategic direction at the top of the agency. Such direction ensures botheffective and efficient performance in terms of the organisation’s man-date, and compliance with statutory accountabilities. Further criticalcomponents underpinning this framework include clearly articulatingthe roles and responsibilities of key players, understanding the nature ofrelationships between officials, constructing clear channels of commu-nication with stakeholders, the promotion of ethical behaviour, settingin place internal control mechanisms, and providing comprehensivereporting procedures (ANAO 1997; CIPFA 1995).

C O R P O R A T E S T R U C T U R E I N L O C A L G O V E R N M E N T

Corporate governance would seem a particularly suitable concept tointroduce into the local government arena in Australia because many ofthe necessary elements have already been set in place. When the statesintroduced their revised local government acts during the 1990s theyrequired all councils to establish corporate management structures.There was a high degree of commonality in this regard. In each case localauthorities were instructed to prepare management plans which set outthe council’s major activities, and identified objectives and performancetargets, over a three to five year period. The functions of elected mem-bers and appointed officials were given greater elaboration and sharperfocus. More stringent accountability procedures were imposed throughthe preparation of comprehensive financial and annual reporting. Inaddition, codes of conduct relating to pecuniary interests and meetingpractices were laid down. To complement the corporate framework, themajority of states also introduced provisions to promote openness and


transparency of operation. Such procedures included public meetings,access to documents, and requirements for community consultation.

Across all jurisdictions the rationale driving the legislation was toensure councils were better managed. Two factors in particular laybehind the substance and thrust of the changes. First, there had beengrowing concerns from the 1970s onwards at the ongoing interferenceof elected members in the day-to-day running of councils, particularlyfrom mayors who viewed themselves as CEOs. To counteract this prob-lem, inquiries in New South Wales and Victoria during this period rec-ommended moving to a managerialist framework which placed electedmembers in charge of policy determination and employees for imple-mentation (ACIR 1983, p.19; Tucker 1997, p.85). Second, towards theend of the 1980s the major features of the New Public Management —which included corporate structures — had been introduced into allstate public services. By the early 1990s it was widely perceived to belocal government’s turn for similar reforms.

Lying at the core of the new corporate regime are the respectiveroles and responsibilities of elected members and appointed chief exec-utives, and the way they interact with each other. Councillors have threeseparate but overlapping functions: representing the interests of resi-dents, leadership and strategic policy formulation, and monitoring andreviewing the performance of the council. The appointed chief execu-tive manages the day-to-day activities of the council and ensures thatthe organisation is run efficiently and effectively (under New SouthWales legislation CEOs are referred to as ‘general managers’).

In attributing these functions, the designers of the state acts drewheavily on private sector models. The duties of elected members nowinvolve combining the traditional political requirements of the positionwith the business framework within which company directors work. Thedivision of roles between councillor and manager is intended to ensurethat power is divided between them, and clear lines of accountabilityestablished. Most importantly, purposeful policy development and deci-sion-making can only take place if there is a productive relationshipbetween management and elected members; there must be a mergingof governance and executive roles. The Municipal Association ofVictoria (1996, p.13) depicts the dynamics as in Figure 8.1.

The quality of this relationship is therefore a crucial factor in creat-ing successful community leadership. Without such strategic directionthe other components that are part of the system — objectives, finan-cial plans, evaluation and so on — will be much less viable.


T H E R O L E O F C O U N C I L L O R S

This section looks at the three roles of councillors in detail — what theyare expected to do, and the constraints within which they must function.

The traditional representative role of councillors involves makingsure that the views of constituents are properly considered by the coun-cil and that the substance of council’s deliberations and directions areconveyed back to them. It is essentially a process of advocacy and com-munication. However, this role has been considerably diminished overthe last decade as a result of the much larger areas created by widespreadlocal government amalgamations in several states. In South Australiathe number of elected local government members dropped by almostone-third in the mid 1990s, and by almost three-quarters in Victoriaover the same period. There are now far fewer councillors to cater forthe same — or a growing — number of constituents. In an attempt tocompensate for the reduced quality of representation, most states haveencouraged councils to establish consultative mechanisms, which allowgreater community involvement in decision-making processes (e.g.,MAGLGR 1995, p.7.11).

The second role councillors are expected to fulfil involves formulating


FIGURE 8.1 THE OVERLAP IN THE FUNCTIONS OF COUNCILLORS AND CEOS

NOTE From Municipal Association of Victoria, From Citizen to Councillor, 1996, p.13.

policy, and making decisions that will benefit the community as a whole.This is a difficult task for all elected members, though more so for thoserepresenting highly populated, ethnically diverse urban constituencies.Usually between six and fifteen councillors are confronted with a policyenvironment that can sometimes be volatile and uncertain. At one levelthey must make decisions about a range of disparate issues that are ofimmediate concern to residents. At another, they are expected to under-stand the dynamics of interaction with state and federal governmentsand, in particular, to be able to coordinate effectively with other agen-cies which possess overlapping regional jurisdiction. Finally, electedmembers must confront a situation where the functions of their councilhave expanded considerably in recent decades, but without a commen-surate increase in funding. The imposition of additional state legislativerequirements, and continuing devolution of responsibilities by statedepartments have resulted in the ‘unfunded mandate’ — simply, author-ities must now do lot more with a lot less (LGSANSW 2001, p.14).

This all amounts to a complicated policy milieu. Councillors areexpected to possess a working knowledge of both the local and inter-governmental arenas, identify problem issues, negotiate acceptable solu-tions, and then formulate policies which will maximise outcomes for themajority of the municipality’s constituents. In reality, being able to par-ticipate productively in policy deliberations is a problematic exercise fora good proportion of elected members. Some will have been elected forthe sole purpose of pursuing a narrow agenda of a few issues. Otherswill constitute the well-known ‘pot hole councillors’ whose focus is lim-ited to minor matters (MAV 1996, p.13). Certainly, many elected mem-bers are unable or unwilling to confront the larger picture. In somefrustration, one Victorian CEO observed that, ‘councillors generallyfind it easier to deal with service delivery issues rather than grapplingwith strategic or intellectual questions. They prefer answering questionsabout traffic in residential streets rather than engaging in debate abouteconomic prosperity’ (Dore 1998, p.98).

The third role required of an elected member is that he or sheensure the effective governance of their authority by overseeing theimplementation of policy proposals and reviewing the ongoing perfor-mance of the organisation as a whole. Most state legislation refersexplicitly to the need for elected members to monitor planning andbudgetary activities. In this regard each of the acts assumes that coun-cillors already understand, or will be able to come to grips with, thedetailed internal processes of the authority’s organisational structure.


Elected members are expected to possess the skills to interpret anddigest financial reports and performance outcomes, and participate inthe strategic management cycle.

Just how well elected members can actually fulfil this task is open toquestion. A 2000 survey undertaken in New South Wales found that 64per cent of metropolitan councillors listed their occupation as profes-sional or managerial. These individuals presumably do have the qualifi-cations and/or experience which enable them to evaluate theirauthority’s strategic performance. In regional districts, however, the fig-ure was much lower; just 41 per cent of councillors came from similarbackgrounds (primary producer/farmer was the most commonly listedoccupation in these areas) (NSWDLG 2000, p.24). It can be argued, ofcourse, that those who do not have appropriate experience or qualifica-tions can master the more abstruse aspects of council’s financial activi-ties with due application and effort. A factor working against theaccumulation of such skills, though, is the regular rotation of electedmembers following elections. In New South Wales, an average 43 percent of councillors who were successful in the 1999 election had notstood at the 1995 election (48 per cent in the city and 40 per cent inthe regions) (NSWDLG 2000, p.26). These figures suggest a reason-ably high turnover rate of councillors every four years. Consequently,continuity of office is reduced, and the opportunity to build substantivemanagerial expertise over a period of time is weakened

Separately, the three roles required of councillors — if pursued seri-ously — require hard work and diligence. Taken together they involvea high degree of dedication, and a willingness to acquire a quite com-plex mix of skills. Arguably, the commitment expected from councillors,and the role expectations imposed upon them, are more demandingthan those of their business counterparts, the non-executive director.Directors do not have to accommodate a spectrum of disparate andoften conflicting interests. Their commercial backgrounds equip themwith the experience and insights needed to address largely market-ori-ented policy issues. They will also usually be highly knowledgeablewhen it comes to preparing strategic plans and understanding financialstatements. This is hardly surprising; non-executive directors, unlikecouncillors, are chosen specifically for their expertise. Moreover, suchpersonnel are offered lucrative financial incentives to perform well.

Many elected members, of course, carry out their duties very com-petently. The most capable inject vision and a real sense of purpose intotheir communities. It is clear, nonetheless, that many struggle to cope


with the breadth and depth of the functions required of them. It is a sit-uation that is not helped by the part-time status of the position.Moreover, unlike ministers — or even members of parliament — coun-cillors do not have policy advisors or personal assistants to provide infor-mation and advice, or help them handle the general demands of office.

Consequently, the role of the CEO, and the nature of his/her rela-tionship with elected representatives, becomes a very important one inthe life of any council. This issue is the focus of the following section.

T H E R O L E O F C H I E F E X E C U T I V E O F F I C E R S

CEOs and their senior management have been confronted with thesame order of change as councillors over the last decade or so. The com-plexity and scope of their functions has been transformed. In part thishas resulted from the corporate structures imposed by state govern-ments, and in part from the introduction of federal initiatives such asaccrual accounting practices (AAS 27) and National CompetitionPolicy. However, the expansion in the role of CEOs has been relativelygradual with he or she receiving more assistance along the way thanelected representatives.

Local authorities across Australia had been subjected to ongoingpressures to upgrade and improve their management practices since themid 1980s. The evident deficiencies in the organisational functions ofcouncils were targeted by a number of external bodies. In 1986 theNational Review of Local Government Labour Markets recommendedmeasures to improve training opportunities for municipal employees(Martin 1997, p.216). At about the same time the Local GovernmentDevelopment Program was established by the National Office of LocalGovernment. Over the following decade this program made fundingavailable to enable individual councils to build their capabilities in areassuch as performance measurement, best practice and continuousimprovement (for example, NOLG 1995). Further support to upgrademanagement practices was to come from within the local governmentsector itself. In the early 1990s the Australian Local GovernmentAssociation launched its Integrated Local Area Planning scheme, whichwas intended to strengthen the capacity of councils in such areas asstrategic and corporate planning, inter-governmental relations, and com-munity consultation (ALGA 1993). The Local Government ManagersAssociation, too, played an important role by introducing professionaldevelopment courses through its state branches, and facilitating access touniversity level studies designed for aspiring council officials.


The cumulative impact of these developments was that by the late1990s the great majority of local governments in Australia had devel-oped sound management practices. Many, particularly large metropoli-tan authorities, created sophisticated systems to deal with strategic andfinancial planning, service delivery, and outsourcing. Employees, too,are significantly better educated than they were two decades ago (Jones1981). A growing number possess specialist bachelors and mastersdegrees. By 1998 one commentator was able to state confidently that,‘We have devoted immense resources to become better local govern-ment managers, and the dividends are evident’ (Sproats 1998, p.6).

CEOs who have established an effective strategic managementstructure, and are supported by competent staff, will be well informedabout all aspects of the activities of their domain. Indeed, they are like-ly to have a much more detailed understanding of the critical policyissues facing the authority than any (perhaps all) of the elected mem-bers. Clearly, with such knowledge at their fingertips, the chief execu-tive’s views will carry considerable weight in the course of council’sdeliberations.

This authority derived from policy expertise is further strengthenedby the fact that the CEO possesses substantial control over both staffingand organisational structure. In all six states the revised local govern-ment acts give the CEO responsibility for the appointment, supervisionand dismissal of employees; staff carry out their duties in accordancewith the directions of the chief executive. Only in Queensland do elect-ed members have the right to by-pass the chief executive and appointsenior managers. In Western Australia councils may accept or reject thechief executive’s recommendation for senior appointments, but areunable to substitute a selection of their own. Victorian CEOs arerequired only to consult with the council in relation to senior staffingissues. Tasmania, South Australia and New South Wales give CEOs alargely free rein to hire and fire as they see fit. The intention of the localgovernment acts to distance the elected members from the managerialarm of the authority is reinforced in New South Wales, Queensland andTasmania. In these states councillors are expressly prohibited fromattempting to give individual direction to particular employees (thoughthey may seek advice about issues).

In addition to the above measures, legislation in each state allowsCEOs almost unfettered scope to shape the organisational structure ofthe authority along the lines that they wish. The South Australian LocalGovernment Act alone requires ‘a reasonable degree’ of consultation


with elected members before the chief executive embarks on significantstructural change (s.99.2).

These provisions in the local government acts give CEOs substan-tial discretion for determining the organisation’s staffing profile, andhow the work environment is arranged. When these powers are com-bined with specialist expertise, it places them in a very strong positionto influence both the direction of council decision-making, and themanner in which policies are subsequently implemented. Such domi-nance, of course, may threaten traditional local governance values. In1996 the Australian Local Government Association was concernedenough about the possible dangers of this situation to point out that,‘We must take care to maintain the right balance between effectivedemocratic control and the role of managers in ensuring efficientadministration’ (1996, p.7)

To a considerable extent, however, the potential power of generalmanagers is counterbalanced by the fact that they no longer hold a per-manent position. In all states the chief executive is appointed on a con-tract basis for a period of up to five years, and subject to annualperformance appraisal. CEOs now need to demonstrate to council thatthey have performed satisfactorily over a sustained period if they wish tohave their contract renewed. Just what ‘satisfactory performance’involves, however, can be difficult to pinpoint. It is a question that canbecome problematic for senior managers.

To explore more fully the nature of chief executive/councillor rela-tionships at this point, it is helpful to draw on some of the relateddebates dealing with senior public executives discussed in the public sec-tor management literature. There are a number of similarities in thefunctions of local government CEOs and those of departmental secre-taries at state and federal level

In relation to the broad attributes that public sector senior execu-tives require, Hughes (1998, p.69) suggests that ‘The major skill need-ed of a public manager is how to be a bureaucratic politician, to be ableto interact with politicians and with the outside in a way which is ben-eficial to both oneself and the organization…an effective manager is onewho is a good political player’ (original emphasis). Developing anunderstanding of the political milieu in which councillors operate isclearly a vital exercise for any chief executive. Being able to interactcomfortably in this situation, in turn, necessitates building productiveand cooperative relationships with elected representatives. This may bea far from easy task. Recent studies of the behaviour and careers of


departmental secretaries in the Commonwealth public sector provideuseful insights into the dynamics and attributes involved (Mulgan 1998;Keating 1999; Weller 2001). Critical elements include loyalty and trust.So too is competence in providing sound advice, prioritising policyintentions, and making judgements about the timing and substance ofimplementation strategies. However, in Keating’s view, ‘What ministerswho survive most value is a capacity to respond creatively to a minister’sconcerns, combined with critical and expert appraisal so that they canbe warned in advance of any potential problems’ (1999, p.44).

The manner in which these activities are undertaken, of course,must be tailored to the personal characteristics, capabilities and expec-tations of individual political masters. On occasions, perhaps throughlack of interest or effort, a relationship cannot be developed:‘Sometimes it is just the chemistry that does not work’ (Weller 2001,p.108). Certainly, given the growing complexity of issues involved, andthe increasingly rapid timeframe required for resolution, building rela-tionships between officials and elected members has never been moreintense and stressful.

These observations have considerable relevance for the local gov-ernment arena. This is particularly the case where a CEO is able to workclosely with a popularly elected mayor for four years or so. Here thecontext of the relationship will be similar to that of a minister anddepartmental secretary; the potential exists to build a stable and con-structive partnership. A less secure environment, but one in which aacceptable alliance may evolve, is in councils where a majority of elect-ed members are politically aligned and subject to party discipline.

The most difficult situation for a CEO to find him or herself in is fac-ing a council which consists of a politically unstable group of indepen-dents. Clearly, in this instance, the demands placed on the chief executivemay well exceed those of state and federal departmental secretaries. TheCEO must accommodate up to 15 different personalities with varyingdegrees of ability, knowledge, enthusiasm and commitment, as well asdiverging values. Dealing purposefully with such an eclectic group ofindividuals — and keeping at least a majority onside for most of the time— calls for very high levels of inter-personal skills. The need to success-fully juggle so many interests over a four year term may well leave seniormanagers more vulnerable to accusations of ‘unsatisfactory performance’than their counterparts at state and federal levels.

This raises the question as to what extent general managers are pre-pared to offer ‘frank and fearless’ advice if they feel that their position


is under threat. It is a situation that can arise especially in the last yearof a contract when the incumbent may be concerned about offendingelected representatives. In relation to the federal sphere, there isundoubtedly a perception in some quarters that the integrity of seniorofficials has been compromised (Behm 2002; Grattan 2002). Mulgan(1998, p.9), on the other hand, makes this point:

the argument that insecure tenure reduces the independence ofadvice is far from uncontested. Much depends on what ministersvalue. If they prefer reassurance and flattery, then secretariesdependent on their goodwill will certainly tend to obligeaccordingly. On the other hand, if ministers look for robustadvice that will save them from political trouble, insecure public servants may face greater incentives to be independentand objective.

The problem for chief executives is that they may be called upon toboth flatter and provide ‘robust advice’ at the same time. One NewSouth Wales local government CEO, at least, has no doubts that thecurrent system has had a detrimental impact overall, ‘Contracts ofemployment for senior staff have resulted in a less independent bureau-cracy with less certainty for the future which can effect the long termstrategy, planning and vision of the organisation’ (Barnes 2002, p.12).

TENS ION AT THE INTERFACE

Clearly, from the above discussion, there are many factors — and com-binations of factors — that can lead to tension at the interface betweencouncillors and CEOs. Some of these include an unfavourable balanceof power, misinformation, underperformance, personality clashes, poorcommunication, and disagreements over values. Each of these alone cancause a deterioration in relations.

An additional problem which has been quite salient across moststates is the tension caused by a reluctance to adhere to prescribed rolesand responsibilities. Cetinic-Dorol comments that ‘role ambiguity’ inWestern Australia ‘is still an issue’ (2000, p.42), with both councillorsand management failing to acknowledge the limitations of their posi-tions. In Queensland the Local Government Association has noted thatmany councillors are reluctant to relinquish their involvement in theinternal affairs of the council and leave the CEO free to handle man-agement issues (LGAQ 1998). It has been a similar story in New SouthWales. An ICAC survey of 156 councils in 2001 discovered that aboutten per cent of staff had felt pressured by councillors to do something


they were not supposed to do, or provide information that was confi-dential (2001, p.18). Generally, the Commission found high levels ofignorance among municipal officers about expected roles and relation-ships. This was perhaps not surprising given that a large majority ofemployees had received very little training in appropriate codes of con-duct (ICAC 2001, pp.16–17).

That confrontation between elected members and chief executivesdoes arise is indicated by surveys undertaken in New South Wales andQueensland during 1998. It was discovered that since 1994 there hadbeen an annual turnover in local government CEOs of 13 per cent and12 per cent, respectively (NSWDLG1998, p.34; LGAQ 1998, p.4).Though death, retirement and promotion accounted for a proportion ofthe figures in each state, the New South Wales Department of LocalGovernment, and the Queensland Local Government Association weresufficiently concerned to mount a review to identify causes. Both bodiesreported problems with conflict between senior management and elect-ed representatives. The Queensland Association identified a number ofinstances where hostile relations had developed (LGAQ 1998,pp.28–30). In New South Wales it was found that ‘where there has beena breakdown in the relationship, the situation has not been well managedby all parties’ (1997a, p.31). In an attempt to rectify this problem, theNew South Wales Department distributed a document which containedprocedures directed at reducing antagonism (DLG 1997b).

Termination of the CEO’s contract is usually a last resort for coun-cils. There will be occasions where the working relationship has deteri-orated substantially, but the cost of paying out the chief executive’scontract is prohibitively expensive, or even beyond the resources of thecouncil. In such a situation the authority must stagger along under theweight of an ineffective — even destructive — governance structureuntil such time as a fresh CEO can be appointed and a new relationshipdeveloped.

S O M E C O R P O R A T E G O V E R N A N C E P E R S P E C T I V E S

The significance of the relationship between non-executive directorsand management was recognised by the private sector during the lateeighties. Dominant CEOs and weak directors were perceived as factorswhich contributed to ineffective leadership and, ultimately, business fail-ure (Percy 1994, p.1; Pease and McMillan 1993, p.35). In its report,


the Cadbury Committee emphasised that, ‘the calibre of the non-exec-utive members of the board is of special importance in setting and main-taining standards of corporate governance’ (para 4.10). Their criticalrole, it continued, was to bring ‘an independent judgment’ to mattersof strategy, performance and resources (para 4.11). The 1998 HampelReport on corporate governance also affirmed the importance of com-panies selecting competent and experienced individuals (Hampel 1998,paras 3.7–3.10).

These observations are particularly pertinent to the function ofcouncils. They beg the question as to whether local government, hav-ing already embraced a comprehensive corporate framework, shouldnot also offer similar inducements and support to their councillors ascompany directors receive. First, should elected members be paid amore substantive sum for their services? At present, in all states exceptQueensland, representatives are paid an annual allowance (only theQueensland Local Government Act allows municipalities to pay salaries,with a small proportion of councils taking up this option). The broadissue of providing salaries to councillors was first raised by the AustralianCouncil for Intergovernmental Relations in 1983. The Council sug-gested that payment would ensure a better choice of candidates at elec-tions (ACIR 1983, s.28). Given the increased demands of office in the2000s, this point would seem to hold even greater weight today. It canalso be argued that salaried members are more likely to fulfil their roleswith an added sense of commitment and professionalism. The amountof remuneration involved could vary from municipality to municipalityaccording to circumstance and budgetary constraints. Salaries offeredmay be sufficient to enable individual councillors to reduce their regu-lar day-to-day work commitments, or even perhaps be employed as full-time representatives.1 The expense involved might be offset to somedegree by reducing the number of elected members to seven for largerauthorities, and perhaps three in small constituencies. Consultativemechanisms have already been used as a means to compensate fordiminished representation. There is no reason why this process cannotbe extended further and developed in sophistication (see below).

A second issue relates to education. Both the Cadbury and Hampelreports recommended that when first-time company directors take uptheir position, they should receive special training in the responsibilitiesof the role. This was to be followed by further training from time totime as the broader commercial environment changed. In Australia suchcourses are mounted by the Institute of Company Directors. The local


government associations in each state offer similar types of modules forbeginning councillors. Many individual authorities also provide someform of instruction for their new members. Though important, thistraining does not go far enough. A large proportion of citizens, unlikecompany directors, have had little relevant practical experience withmunicipal activities. Specialised programs designed by the universities toimpart such skills as policy analysis, financial management, interperson-al communication and ethical behaviour would help to build a profes-sional approach.

Higher order training for councillors will contribute to a betterunderstanding of their role, and that of the general manager. This, inturn, will help to foster a more inclusive organisational culture withincouncils. The Hampel Report pointed out that ‘Good corporate gover-nance is not just a matter of prescribing particular corporate structuresand complying with a number of hard and fast rules. There is a need forbroad principles’ (Hampel 1997, para.1.11). The appropriate principles— which have been overwhelmingly endorsed by both the private andpublic sectors — are those of the Cadbury Report: integrity, opennessand accountability. It is only when structures are driven by these princi-ples that sound corporate governance unfolds. As the New South WalesDepartment of Local Government has indicated in relation to role con-flict, ‘it is not possible to legislate for the nature of the relationshipbetween mayors and general managers’ (1990, p.12). Similarly, withcodes of conduct; ‘it is easy to stick them on the wall, but hard to makethem stick in practice’ (Nelson 2000, p.138). Nor can such behaviourbe written into the CEO’s contract. Rather, the application of principlesto structure requires goodwill, commitment and professionalism fromall parties.

The adoption of corporate governance principles within localauthorities must begin by reaching a clear understanding of the rolesand responsibilities of elected members and general managers, and thenature of the relationship between them. The scope and outcomes ofthis activity will be unique to each regional area (though it must obvi-ously be consistent with that state’s legislation). Participants may welluse documents like the NSW Department of Local Government’sGuidelines to Reduce Conflict of Interest in Councils (1997) as a startingpoint. However, the substance of this activity will be greatly influencedby the particular requirements and characteristics of the locality. Theprotocol that emerges should be renewed after each election, and per-haps revisited from time to time in between. The process should also be


transparent to both employees and the broader community. A commit-ment to openness and integrity at the top makes it much easier to inte-grate such principles into the strategic structure and performance of thecouncil.

Finally, a critical aspect of the exercise of defining roles and respon-sibilities needs to be an honest appraisal of the contribution made byelected members. If they reside in an amalgamated municipality, coun-cillors have to understand and recognise the limitations of their repre-sentative duties. Part of the corporate governance process should be theestablishment of a citizens consultative committee that supplements therepresentative function of councillors. The committee’s recommenda-tions will feed directly into the council’s deliberative process andbecome integrated into the organisation’s strategic cycle. Sound corpo-rate governance at the local level should embrace and promote partici-patory democracy.

C O N C L U S I O N

The local government reform legislation of the 1990s was designed toinstil corporate discipline into council activity across the states. It wasenvisaged that the business framework would ensure a much greatersense of strategic direction and improved efficiency of operation. Thereis no doubt that these intentions have been met to a considerableextent; local authorities are, by and large, much better managed thanthey were in the late 1980s.

However, in the course of the decade following the introduction ofthe local government acts, problems have emerged. The current roleexpectations of councillors are beyond the capacity of many — perhapseven the majority — of elected citizens to fulfil. The operational envi-ronment of local government has become much more complex anddemanding, and constituents increasingly sophisticated in the level ofservice they expect. The spate of amalgamations in several states has alsoundoubtedly weakened the capability of members to represent theneeds of residents. In addition, the proposed greater clarity in definitionof the roles of CEOs and councillors has clearly not been realised. Inshort, many councils do not function as effectively as they could.

The suggestion here is that the responsibilities and functions ofboth councillors and CEOs would be significantly enhanced by embrac-ing more fully the spirit and substance of corporate governance. Withthe exception of government business enterprises, the structures and


principles put forward by the Cadbury and Hampel Committees havegreater relevance and applicability to local authorities than almost anyother public sector institution. A smaller number of salaried (and possi-bly full-time) councillors, with appropriate training, would almost cer-tainly inject an enhanced degree of professionalism into the conduct ofmunicipal affairs. Operating more closely along the lines of a hybridboard of directors, councillors and the CEO would be well-positionedto offer improved levels of performance in policy formulation and com-munity leadership. Integrated into each council’s strategic frameworkwould be provisions to ensure citizen consultation and public participa-tion in decision-making. Corporate governance offers the prospect ofnot only improved management practices, but also reinforcement of thesector’s democratic values.

ENDNOTE1 In Queensland, a small proportion of councillors — less than 10 per cent — are

employed on a full-time basis in some of the largest local government authori-ties. In other states, such full-time status is limited to a few mayors of majorurban municipalities.


PA R T D P O L I C Y R E F O R M

The study of networks has been very much in vogue in recent years.According to Kenis and Schneider (1991), the network concept seemsto have become ‘the new paradigm for the architecture of complexity’.The widespread use of network concepts across a variety of disciplinesand the ‘Babylonian’ variety of different understandings and applica-tions of the policy network concept in policy studies has been high-lighted by Borzel (1998). She proposes to bring order by delineatingtwo schools of analysis. The first one is the ‘interest intermediationschool’ that analyses the inter-relationship between state and societalactors (mainly interest groups) in the formulation, implementation andevaluation of public policy. In this chapter we will focus on the coreconcern of the second policy network school identified by Borzel. Thisis the ‘governance school’ that views policy networks as an alternativeform of governance to hierarchy and market and analyses networkmechanisms for mobilising resources that are widely dispersed betweenpublic and private actors.

The chapter naturally divides itself into three main sections. Thenext section will examine the ways in which local authorities can beinvolved in multi-organisational partnerships (MOPs). The problemsinvolved in co-ordinating these implementation structures are then con-sidered before a comparative institutional analysis of markets, hierar-chies and networks as alternative governance mechanisms is undertaken.The issue of whether local government has the capacity to deploy eachof these mechanisms is then addressed before the chapter concludeswith some brief remarks.

9

P O L I C Y N E T W O R K S A N D L O C A L G O V E R N M E N T

Joe Wallis

L O C A L G O V E R N M E N T I N V O L V E M E N T I NM U L T I - O R G A N I S A T I O N A L P A R T N E R S H I P S

( M O P s )

There would seem to be two main ways in which local authorities canbe involved in MOPs. Firstly, central and/or state government may co-opt local bodies, along with other organisations, into policy initiativesthat are targeted at local communities. The engagement of local author-ities, along with other government agencies, neighbourhood associa-tions, voluntary organisations and community groups in the communitypolicing initiatives followed by many Australian states is a salient exam-ple of this form of MOP. Secondly, local authorities may exercise theirown initiative in establishing collaborative partnership arrangementswith other organisations. Typical examples of this would be where localgovernments join with local business leaders and tertiary institutions tofacilitate small business development or develop a strategy to make thelocal area more attractive for new investment. Similarly, in many coun-tries, including Australia, local authorities have been active in establish-ing collaborative relationships with businesses, voluntary organisationsand community associations in the fields of urban and rural regenera-tion as well as in social care, education, environmental and other policysectors (Lowndes and Skelcher, 1998, p.314). Regional Organisationsof Councils (ROCs) represent a further Australian example (that is dis-cussed further in Chapter 12).

These tendencies appear to have gained momentum in the last twodecades as ‘decrementalist’ fiscal policies have placed resource-con-strained local bodies under more pressure to develop new sources offinance. In this MOPs can enable local bodies to gain access to grantregimes that require financial and in-kind contributions from the privateand voluntary/community sectors. They can also use their private sec-tor partners to overcome public sector constraints on access to capitalmarkets (Mackintosh, 1992).

Over the same period, the organisational and management changesthat have been undertaken at all levels of government in Australia andother English-speaking nations have also expanded the scope for MOPs.In particular, the restructuring of large bureaucratic structures into sin-gle goal agencies (Hood, 1991) that, in some cases, have been sold offto the private sector, and, in other cases, been kept at ‘arms length’ fromeach other through quasi-market arrangements, such as the ‘purchaser-provider split’, has tended to increase the fragmentation of the publicsector. As the range of different agencies responsible for shaping and

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delivering policy has increased dramatically, the problems of horizontalco-ordination that arise in this ‘polycentric terrain’ (Rhodes, 1997,p.xii) have often been addressed at the local level where partnershipsprovide a means of developing strategic direction and sustaining co-ordination. The possible benefits of partnership arrangements havebeen summed up by Lowndes and Skelcher (1998, p.315) as follows:‘Partnerships have the potential to increase resource efficiency, makingbetter use of existing resources by reducing duplication and sharingoverheads. They can add value by bringing together complementaryservices and fostering innovation and synergy.’

The central feature of multi-organisational partnerships is theirunderlying ‘structures of resource dependency’ (Rhodes, 1988). Thisarises because the groups and organisations that could potentiallybelong to them control different amounts and types of resources:authority, legitimacy, money, information, and so on. They could there-fore benefit from engaging in processes of deliberation, compromiseand negotiation that produce a system of horizontal co-ordinationthrough which dispersed resources can be mobilised and pooled so that‘collective (or parallel) action can be orchestrated towards the solutionof a common policy’ (Kenis and Schneider, 1991, p.36). The next sec-tion will consider the problems involved in achieving horizontal co-ordination before conducting a comparative institutional analysis ofalternative governance mechanisms.

O V E R C O M I N G C O - O R D I N A T I O N P R O B L E M ST H R O U G H A L T E R N A T I V E G O V E R N A N C E

M E C H A N I S M S

Two major problems would appear to stand in the way of the emergenceof a system of horizontal co-ordination within MOPs. The first is the‘prisoners’ dilemma’ or bargaining dilemma that arises in situationswhere defection from co-operation is more rewarding for opportunisti-cally rational actors than compliance, due to the risk of being cheated(Scharpf, 1992). Some actors may withhold the resources they haveagreed to contribute to partnerships and attempt to ‘free-ride’ on thecontributions other parties make to the advancement of common goals.Secondly, there is what Borzel (1998, p.261) terms the ‘structural dilem-ma’ that arises because the actors that engage in partnership decisions areoften agents of the groups they claim to represent. This agency problemis likely to become particularly acute when the issue of whether collabo-rative arrangements should be extended to include the purported

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‘leaders’ of community groups. A number of doubts are likely to beexpressed by the representatives of more formal organisations. Thus: ‘Dothey really speak for the groups or organisations they claim to lead?’Similarly: ‘Can they bind these groups or organisations to the agree-ments or understandings we reach together?’ These attitudes can, inturn, be a source of frustration to the community leaders concerned.

Markets, hierarchies and networks can each be viewed as alternativeinstitutional responses to these co-ordination problems. Attempts byeconomists to differentiate alternative modes of governance often takeas their point of departure the emphasis seminal thinkers in the ‘newinstitutional economics’ (NIE) tradition (Coase, 1937; Williamson,1985) gave to markets and hierarchies as distinct governance structuresassociated with specific types of transaction costs. Subsequent develop-ments in this tradition have added a third category to this scheme.Different triads of terms have thus emerged: markets, hierarchies andnetworks (Thompson et al., 1991); community, market and state(Streek and Schmitter, 1985); markets, bureaucracies and clans(Ouchi, 1991); price, authority and trust (Bradrach and Eccles, 1991);and markets, politics and solidarity (Mayntz, 1993). All these harkback, in a sense, to Boulding’s (1978) distinction between exchange,threat and integrative relationships. Although there are differentemphases in these schemes, they can be viewed as three ideal types(Powell, 1991). It should be borne in mind, though, that no feasiblesystem of governance is likely to conform exactly to any pure idealtype. As Bradrach and Eccles (1991, p.289) point out: ‘Price, author-ity and trust are combined with each other in assorted ways in theempirical world’.

THE MARKET MECHANISM OF GOVERNANCE

One possible solution to horizontal co-ordination problems in MOPsmay be through a market system of governance in terms of which theresource contributions of the various partners would be specifiedthrough a series of legally binding contracts. At least some measure ofhierarchy may be required to operate this contractualist mode of gover-nance. This could take the form of an organisational structure, such asa contract management agency with the authority to enter into andmanage contracts with the various partners. The property rights impli-cations and key features of this predominantly market mode of gover-nance have been succinctly summarised by Lowndes and Skelcher(1998, p.318):

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Price mechanisms are the means by which the relationships aremediated and where conflicts emerge there may be haggling orrecourse to law in order to determine the liabilities of the par-ties involved. Markets provide a high degree of flexibility toactors in determining their willingness to form alliances,although the competitive nature of the environment and theparties’ underlying suspicion may limit the degree of commit-ment to any collaborative venture.

This mode of governance may give rise to particular transactioncosts that render it incomplete in the case of MOPs. Hindmoor (1998,p.30) has identified four different sources of transactions costs thatcould have this effect: ‘complexity’; ‘power asymmetries’; ‘informationasymmetries’; and ‘thinness’.

With respect to complexity he argues that ‘a proposed exchange ismore complex the larger the number of contingencies that have to beconsidered ex ante by both parties before being able to specify what willex post constitute satisfactory performance of an agreement’ (p.30).The number of contingencies that arise in MOPs may simply be toolarge to be governed by a complete system of contracts. Moreover, thequalities of ‘consummate co-operation’— the use of judgment, enthu-siasm and initiative— that may be expected of the parties involved inthese collaborative arrangements may simply be too difficult to definein contractual terms.

Apart from these complexities, the potential effect of power asym-metries may discourage some groups and organisations from participat-ing in these arrangements. In this regard, Hindmoor (1998) suggeststhat some parties may be reluctant to engage in contractual arrange-ments with central government agencies since they may fear that theywill be unable to enforce compliance or achieve compensation throughthe courts because of the unique capacity the government has to ‘over-turn or ignore judgments against it’ (p.31). Lowndes and Skelcher(1998) have found that where contractualist arrangements are used togovern program delivery by MOPs, power asymmetries may work tothe detriment of voluntary and community organisations. For example,despite ‘official insistence’ on community involvement in the urbanregeneration projects they studied, these organisations were oftenexcluded.

A third (and very familiar) source of transactions costs in contractu-alist arrangements resides in information asymmetries. These ‘occur andcomplicate exchange when the underlying circumstances relevant to a


trade are known by one or more but not all parties to that exchange’(Hindmoor, 1998, p.31). The tendency by actors in market modes totreat information as a type of property to be used to gain an advantageover their collaborators, as well as their competitors, may inhibit thefree flow of information and cause information asymmetries to persist toa degree greater than that observed with network modes of governance.

The fourth source of transaction costs mentioned by Hindmoor(1998) arises when transactions are ‘thin’ since ‘the smaller the numberof trading partners an actor can deal with to achieve their desired objec-tives’, the more likely it is that ‘the very consummation of an exchangecan leave one or both actors more reliant upon the other’ (p.32). Thisappears to be a general formulation of the problem of asset specificityanalysed by Williamson (1985). In the context of multi-organisationalpartnerships, Hindmoor (1998) essentially argues that the more com-plex the system of contracts becomes in terms of the contingencies itcovers, and the more specific tasks are contractually allocated to differ-ent partners, the greater the dependence these partners will have on oneanother and therefore the greater the risk they face of being oppor-tunistically exploited by each other.

When these factors cause the transactions costs associated with mar-ket modes of governance to be high, other modes such as hierarchies ornetworks may be more efficient. Consideration does need to be given,though, to the types of transaction cost they generate. The next sectionwill do this with regard to the hierarchical mode of governance.

THE H IERARCHIC AL MECHANISM OF GOVERNANCE

A hierarchical solution to the problems of horizontal co-ordination in aMOP could involve the establishment of a bureaucratic structure withclear roles, responsibilities and reporting lines to co-ordinate the inputsof the different organisations. This could be overseen by a partnershipboard in which the number of votes held by the representatives of thedifferent organisations could be clearly established. This may overcomesome of the problems of co-ordination and collaboration found withmarket modes. As Lowndes and Skelcher (1998) put it:

The imposition of an authoritative, integrating and supervisorystructure enables bureaucratic routines to be established. Co-ordination can be undertaken by administrative fiat, and theemployment relationships pertaining within the organisationencourage at least a certain level of commitment by staff(p.318).

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Significant transaction costs could, however, be involved in estab-lishing such a hierarchical structure and maintaining its authority overtime. Lowndes and Skelcher (1998) refer to the potentially high nego-tiation costs that could be involved in establishing a partnership board:

Partnership creation involved negotiation and contest over‘who’s in and who’s out’, a significant shift to hierarchical struc-tures compared with the relatively fluid memberships and indis-tinct boundaries in pre-partnership collaborations ... Differentrepresentatives within a partnership drew their legitimacy fromdifferent sources (from election, appointment, common experi-ence, professional expertise, leadership skills) but these variousmandates were not mutually recognised and there was a lack ofclarity about their relative value (p.325).

The transactions costs associated with establishing a hierarchywould thus appear to be related to the degree to which a contest forauthority arises between the potential partners. This may explain whyhierarchical structures can emerge with relative ease in cases where thevertical line of authority is largely uncontested. Hindmoor (1998,pp.33–34) thus observes that ‘in the case of the employee-employerrelationship, hierarchy is attractive to both parties because it is assumedthat the employee has no particular preference over the nature of thetasks they are called upon to perform’.

Unfortunately, this is unlikely to be the case with a multi-organisa-tional partnership since the potential partners ‘cannot remain indiffer-ent to the direction in which authority is exercised as it is precisely thisthat they seek to influence’ (Hindmoor, 1998, p.34). Indeed, it is pos-sible that the contest for authority between these actors may be unre-solved and a hierarchical structure may fail to form. Alternatively, it mayonly be possible to form a partnership board by deliberately excludinggroups or organisations that cannot accept its authority. The MOP maythus have to function without their co-operation. However, even if areasonably inclusive structure can emerge from this contest for author-ity, it is likely to have a tendency toward formalisation and ‘routinisa-tion’ that may result in further transactions costs in terms of reducedflexibility and innovation.

It would seem, then, that both market and hierarchical modes ofgovernance may be incomplete or subject to high transactions costs.Questions must then be raised about the relative desirability of net-works as a mode of governance for MOPs. Can they form and function


with lower transaction costs than markets or hierarchies? Are they moreflexible or inclusive? Can they elicit greater commitment from potentialpartners? It is to these questions that we now turn.

THE NETWORK MECHANISM OF GOVERNANCE

Networks cannot be simply distinguished from other governance mech-anisms by the presence of trust and absence of rules in network-likerelationships. Although most writers on networks would agree withHindmoor (1998, p.25) that to understand how these governancemechanisms develop ‘it is necessary to understand how and why trustemerges’, this does not imply that trust is not also an important factorreducing the transactions costs of markets and hierarchies. The essentialdifference is that while ‘markets and hierarchies generate trust by pro-viding institutional safeguards ... the defining characteristic of a networkis a trust that does not depend on the presence of formal and exogenoussafeguards’ (p.34).

Moreover, this trust is based on a confidence that the actors in anetwork will not break the rules that circumscribe the boundaries oftheir co-operative behaviour. These rules have been conceived in a vari-ety of ways. Rhodes (1988, pp.42–43) finds the differences betweenvarious types of ‘policy networks’ residing in the ‘operating codes’,‘underlying philosophies’ and ‘rules of the game’ that govern relationswithin them. Wilks and Wright (1987, p.305) refer in a similar vein tohow the avoidance of disputes within such networks is tantamount to‘an unwritten constitution’ governing relationships. In a correspondingmanner Jordan and Richardson (1979, pp.100–101) have sought toidentify the ‘operation understandings’ that influence ‘the process bywhich and the atmosphere within which ... policy-making is resolved’.They highlight the importance of rules that allow actors to achieve‘understandings which benefit all participants’ (p.472). According tothis view, such rules are constitutive of policy networks since they giveeach actor information about how others can be expected to act andthereby enable collaborative activity to be undertaken ‘in a contextwhere participants already have mutual needs, expectations and experi-ences’ (Jordan, 1990, p.326).

The main difference between the rules and understandings thatgovern network relationships and those that characterise markets andhierarchies would thus seem to lie in the informality. As Hindmoor(1998, p.35) has pointed out: ‘It is trust that makes the emergence andsurvival of such rules possible.’ The main problem facing network

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theorists would therefore seem to be to explain how the collaborativeactivities within the context of ‘interdependent relationships based ontrust, loyalty and reciprocity’ that they typically associate with networkscan be developed and sustained.

Over the last two decades game theorists have made considerableprogress in developing their understanding of the conditions underwhich it is rational for agents to trust and co-operate with one another(Axelrod, 1984; Coleman, 1990; Kreps, 1990). The following factorsdifferentiate the games modelled by these theorists from the ‘prisoners’dilemma’ situations that render socially sub-optimal non-co-operativestrategies rational from an individual perspective: the number of actorsis relatively small; contact with those outside the network is limited;interaction between actors is expected to be frequent; and co-operationin one area can be made contingent upon co-operation in other areas.Under these conditions actors will calculate the impact their non-com-pliance with network rules will have on their reputation within, andfuture access to, the network. Where each member holds a mutualexpectation that the costs of non-compliance will exceed the benefits,trust and co-operation can develop since, as Gambetta (1988, p.10)puts it, ‘actors will trust since they have reason to trust’. The resultinginterest-based network (IBN) can thus be expected to function as a sta-ble governance mechanism despite the absence of formal sanctionsagainst non-compliance with its ‘rules’.

Hindmoor (1998) has suggested that the IBNs that emerge fromthese repeated games are likely to take the form of ‘policy communities’rather than ‘issue networks’. Some of the distinctions between thesetwo types of ‘policy network’ are depicted in Table 9.1 (adapted fromMarsh and Rhodes, 1992, p.251).

For governance within a MOP to take the IBN form of a policycommunity it would seem that the complementarity of interestsbetween partners should arise from a relatively balanced structure ofresource dependencies. Access to the MOP must therefore be limited tothose partners who can make significant resource contributions.Moreover, these contributions would not be limited to a particular pro-ject but would occur in the context of an ongoing policy issue, or seriesof interconnected issues, in respect of which the actors share the sametacit or paradigmatic understanding. Their need to engage in ‘frequent,high-quality interaction’ with respect to this issue or issues would havethe effect of transforming a ‘one-off’ game into an iterated relationship.As negotiations become embedded within other negotiations, trust and


co-operation can develop since actors will realise that defection in anyone area can lead to the unraveling of co-operation in other areas. Thischaracteristic of what Granovetter (1985) termed ‘embeddedness’would seem to save the transactions costs of setting in place more for-mal safeguards against non-compliance with network rules.

The institutional disadvantages of IBNs do, however, become clear-er the more they conform to the ideal type of a policy community. Inthe first place, these governance mechanisms can become as elitist andexclusive in their own way as hierarchies. Moreover, their informalitycan make it difficult to hold them publicly accountable in the same wayas hierarchical structures that function under the aegis of elected publicbodies such as Australian local governments. In their survey of theurban regeneration activities of MOPs, Lowndes and Skelcher (1998,p.328) found that:

The importance of informality, personal relationships and trust... was regarded negatively by some of our informants. Network-style relationships were viewed by those who felt excluded ormarginalised as ‘cosy’, ‘cliquey’ or ‘sewn-up’. The reliance onsocial contact, friendship and personal trust made it hard fornew actors to ‘break in’ to networks.

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TABLE 9.1 DIFFERENCES BETWEEN POLICY COMMUNITIES AND NETWORKS

These observations have recently been echoed by writers such asKrugman (1998) in the critical reappraisals they have made of thosefeatures of ‘croney capitalism’ in East Asian developmental states thatlay behind the recent outbreak of ‘Asian contagion’. Not only were thefinancial initiatives of elite policy communities in these countries lack-ing in the transparency that characterised arms-length financial trans-actions in Western countries but, in many cases, they involved animplicit government guarantee of business solvency that encouragedthe kind of risky investment decisions that contributed to the specula-tive ‘bubbles’ that preceded the eventual ‘crash’ in asset values in thesecountries.

More specifically, it would seem that IBNs may ossify into ‘iron tri-angles’. These associations of local government standing committeecouncillors, professional managers and ‘insider’ interest groups can col-lude to keep in place programs that confer benefits on each party whilespreading costs over the local rate-paying or national tax-paying popu-lation while, at the same time, denying other groups access to the localpolicy process.

Policy communities have also been portrayed as sources of resis-tance to change. In Britain, case studies based on the ‘Rhodes model’have been made of policy networks in agriculture, civil nuclear power,youth employment, smoking, heart disease and health services, infor-mation technology and exchange rate policy (Marsh and Rhodes1992). Most of these networks were found to exhibit, to a varyingdegree, the properties of policy communities so that ‘in each area alimited number of groups enjoyed privileged access to policymakingshaping both the policy agenda and policy outcomes’ (Rhodes andMarsh 1992, p.199). Significantly, Rhodes and Marsh (1992) con-clude that such policy networks can act as a major constraint on poli-cy change. These writers point out that such networks ‘do notnecessarily seek to frustrate any and all change but to contain, redirectand ride-out such change, thereby materially affecting its speed anddirection’ (pp.196–97).

There are also opportunity costs associated with the time and effortinvolved in networking activities. In this regard Lowndes and Skelcher(1998, pp.322–23) make the following comment:

Getting to know key individuals and building relationships tooktime and could distract organisations from their ‘core business’.As one informant noted: ‘You could pack your week with inter-agency meetings, but what would you drop then?’


Less obviously, from a perspective that focuses narrowly on transac-tions costs, there may be what Borzel (1998) terms ‘redundant possi-bilities’ in such apparently wasteful networking activities. Moregenerally, network interaction would seem to provide the basis for theformation of ‘social capital’.

During the last decade there has been an extraordinary outburstof research by mainstream economists, political scientists and sociolo-gists into the link between various definitions and indicators of socialcapital and regional and national variations in economic, social andpolitical performance. The emerging body of theory has been hailedas providing a critical link between the fields of economics, sociologyand political science, signifying their convergence toward the viewthat economic activity does not occur in a vacuum, but rather withina broader social and institutional environment. Most of these socialscientists take as their point of departure the work Robert Putnam(1993) did on regional variations in associational activity in Italy. Hehighlighted the long tradition of civic engagement that had distin-guished Northern from Southern Italy. Although this tradition had itsmodern expression in the form of high levels of participation in sportsclubs, voluntary associations and choral societies, he pointed out thatthese patterns of social co-operation go back to the thirteenth centu-ry. His main thesis was that this tradition of civic engagement hadproduced larger stocks of ‘social capital’ that significantly accountedfor the long-term historic gap between Northern and Southern Italyin terms of measures of both economic performance and governmen-tal effectiveness.

In identifying the key components of social capital as ‘networks ofcivic engagement’, ‘norms of generalised reciprocity’ and ‘relations ofsocial trust’, Putnam begged the question of which components are‘epiphenomenal, arising as a result of social capital but not constitut-ing social capital itself ’ (Fukuyama, 2001, p.7). Putnam’s (1993)analysis suggested that norms and trust were derived from networks.His argument was that through repeated interaction in networks that‘are primarily horizontal bringing together agents of equivalent statusand power’, norms are ‘inculcated and sustained by modeling andsocialisation (including civic education) and by sanctions’ (Putnam,1993, pp.171–72). The most important of these norms is a gener-alised reciprocity which ‘refers to a continuing relationship ofexchange that is at any time unrequited or imbalanced, but thatinvolves mutual expectations that a benefit granted now should be

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repaid in the future’ (p.172). The establishment of this norm willallow ‘dense networks of social exchange’ to form in which ‘peoplecan be confident that trusting will be requited, not exploited’ (p.172).Higher levels of social trust forged through repeated interaction willthus not just lower the transactions costs associated with networks butthose with markets and hierarchies as well. Thus while networks maybe seen as an institutional alternative to these alternative governancemechanisms, social capital theory suggests that it may complementand reinforce them as well.

The wealth of empirical and case study material (recently sur-veyed by Woolcock and Narayan, 2000) that followed Putnam’swork, has tended to emphasise the importance of the bridging socialcapital that forms across group and agency boundaries as comparedto the ‘bonding’ social capital that forms within cohesive socialgroups or communities. The question of whether local authoritiescan function as effective ‘bridging organisations’ will be consideredin the next section.

The comparative institutional analysis undertaken in this section ofmarkets, hierarchies and networks would suggest that no mechanismcan a priori be argued to be a superior mode of governance for multi-organisational partnerships. The importance of the role that local gov-ernments can play in these structures needs, however, to be exploredin more detail. Are they uniquely placed to bring potential partnerstogether? Do they have the capacity to select which governance mech-anism is the most efficient and effective in a particular situation andthe flexibility to adapt the mix of modes to changing circumstances?And, in particular, can they deploy the facilitation skills required totake full advantage of the possibilities for networking within a localgovernance system?

T H E C A P A C I T Y O F C O U N C I L S T O S U P P L YL O C A L G O V E R N A N C E

The comparative analysis of markets, hierarchies and networks in theprevious section seemed to suggest a potentially important role forlocal government in the implementation structures that deploy thesegovernance mechanisms at the local level. This section will focus onthe special resources local governments can contribute to these struc-tures and will then turn its attention to factors that can determinewhether they play a ‘minimalist’ or ‘activist’ role in the supply of localgovernance.


THE POTENT IAL C ATALYT IC FUNCT IONS

OF LOC AL GOVERNMENT

In many countries, including Australia, local governments can make useof unique institutional resources that can enable them to play a catalyt-ic role in the formation and development MOPs. Their multi-purposestructure and the discretion they typically have over the range of com-munity services they seek to provide and the delivery mechanisms theyuse in providing them has been a concern to government failure theo-rists since these characteristics of local authorities make it difficult tosubject them to vertical lines of authority within which they can bemade accountable for clearly specified outputs. However, it is thesesame characteristics that make local authorities particularly suited totheir role of being suppliers of community governance. As they seek todevelop this role they are also likely to expand their institutional mem-ory as a result of having to learn how to cope with, and adapt to, therange of pressures that can be traced to the drive by both central gov-ernment and citizen ratepayers to make local governments deliver morefor less.

To cope with these pressures, local authorities have had to restruc-ture themselves to both retain an ‘in-house’ capacity to supply strategicdirection to the range of organisations and groups they collaboratewith, and to develop a capacity to manage the mix of governance mech-anisms they deploy in serving their ‘communities of interest’. An intra-organisational structure that separates advice from implementation,regulation from service delivery and commercial from non-commercialfunctions can enable local authorities to contract-out those services andfunctions in respect of which the transactions costs of market gover-nance are lower than those associated with hierarchical in-house provi-sion. At the same time the pressure on local authorities to deliver morefor less may induce them to engage in the type of networking activitiesthat Lowndes and Skelcher (1998) suggest can constitute necessarypreparation for the formation of MOPs.

Local governments can position themselves at the centre of thesenetworks. They can bring key resources of democratic legitimacy andthe informational advantages they may have developed where they havea history of working with local groups and agencies to solve problemsthat cross-organisational boundaries generate. The potential for localauthorities to exploit the integrative possibilities of their facilitative rolein IBNs will depend on their political and administrative capacity. Therelationship between the relative ‘activism’ of the role local authorities

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can play in their communities of interest and the various dimensions oflocal governmental capacity must now be considered.

MATCHING THE ROLE OF LOC AL GOVERNMENT

TO ITS C APACITY

Two opposing principles are commonly proposed to guide the devolu-tion of government functions to the local level. The first is the residu-ality principle that holds ‘that local government should be selected onlywhere the benefits of such an option exceed all other institutionalarrangements’. One rationale for the application of this principle is theview that local authorities are even more prone to government failurethan other forms of public organisation (a proposition argued inChapter 11). As a result local governments should play a minimalist rolein the local economy that restricts them to the provision of those localpublic goods in respects of which the benefits from decentralisation sig-nificantly exceed the costs associated with potential government failure.

A second principle that is the logical antithesis of the residuality prin-ciple in that it implies a presumption for, rather than against, the devo-lution of responsibilities to local government is the subsidiarity principlewhich holds that ‘no organisation should be bigger than necessary andnothing should be done by a larger and higher unit than can be done alower and smaller unit’. The most notable international application ofthis principle is by the European Union in its relations with individualnation states. It appears to legitimise a highly activist role for local gov-ernment in the local economy since it would not only appear to be basedon an optimistic assessment of the benefits of decentralisation relative tothe costs of local government failure, but also an appreciation of thecomparative institutional advantage local bodies can play in the partner-ship-forming and networking activities described in this chapter.

Reid (1999) argues that the subsidiarity principle can be used to for-mulate a checklist of the key criteria for determining the location ofaccountability — not only between different spheres of government butalso between governments and communities. More specifically, he con-tends that any such checklist ‘needs to address the distribution of ben-efit; information needs and complexity; the relative importance of localknowledge and national consistency; the degree of national significance;the importance of critical mass and value of local discretion’ (1999,p.180). In practice, the application of this principle would seem torequire an empirical assessment of the capability of different levels ofgovernment to undertake particular activities.


This pragmatic approach is reflected in some recent contributionsby the World Bank to the problem of defining an appropriate role forgovernment in a way that takes account the significant variations in‘state capacity’ that were highlighted as ‘considerable evidence accu-mulated during the 1980s to suggest that states varied widely in theirability to set the terms for economic and political interactions and tocarry out the functions assigned to them’ (Grindle, 1996, p.4). Thesecontributions express a growing awareness that although govern-ments cannot create wealth per se, they nevertheless can play a keyrole in the process of economic development. Indeed, the World Bank(1997) now tends to refer to the ‘enabling state’ as a crucial ingredi-ent in achieving higher rates of economic growth. At the very least thestate must provide various fundamentally important functions, includ-ing the creation and maintenance of law and order, the provision ofbasic social services and physical infrastructure, and the establishmentof a stable and coherent policy environment. But apart from theseminimalist functions, the state can enhance economic activity in otherways too.

There are three basic levels at which local governments can inter-vene, depending on their institutional capacity. To undertake even ‘min-imal functions’, local governments must have both the revenue-raisingand institutional capacity to administer necessary local regulations andprovide genuinely local public goods such as library services and rub-bish collection whose benefits do not extend significantly beyond a par-ticular community. The demands on local government capacity will bemuch greater where they seek to provide intermediate functions. TheWorld Bank (1997, p.27) has described the role of government in theprovision of intermediate functions as follows: ‘Here, too, the govern-ment cannot choose whether, but only how best to intervene, and gov-ernment can work in partnership with markets and civil society toensure that these public goods are provided.’

While these remarks are directed toward an assessment of the capac-ity of national states, they are also clearly relevant to local government,as the discussion of different governance mechanisms in this chapter hassought to make clear. Finally, it would appear that ‘activist functions’,like intervention to generate increased co-ordination and develop‘social capital’ should only be undertaken by local authorities with ahighly sophisticated capacity for governance and even then only withgreat care. The issue of how to address the gap between the functionslocal authorities can be called upon to perform, either by central gov-

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ernment or by their local electors, and their capacity to perform themmust now be considered by way of conclusion to this chapter.

C O N C L U S I O N

The 1997 World Bank Development Report identifies two genericapproaches to the problem of closing the gaps that exist between thefunctions and capacity of government bodies. Firstly, policymakers canattempt to match the agency’s role ‘to its existing capability, to improvethe effectiveness and efficiency of public resource use’ (World BankDevelopment Report, 1997, p.25). In the case of local governmentreform this may involve recognition of the high propensity for govern-ment failure at this level that leads to a ‘minimalist’ approach to down-size local government so that it can focus on maintaining itsadministrative capacity to engage in the core business of supplying localpublic goods.

Secondly, policymakers can seek ways of enhancing government‘capacity by reinvigorating public institutions’ (p.3). This quest mayinvolve both a comprehensive reform of the structure and managementof local authorities to reduce the scope for government failure and anexploration by the management of these authorities of the range ofmechanisms discussed in this chapter that can enhance their capacity toplay a more activist, catalytic role in local governance.

This quest may therefore have to embrace elements of the ‘possibil-ism’ that Hirschman (1971) argued could counter and balance the ‘fra-casmania’ — an exclusive focus on the potential for government failure— that could blind development analysts to the possibilities of forming‘linkages’ or networks to address the unexpected problems that ariseduring the course of implementing development programs. Hirschmanfamously favoured an ‘unbalanced’ growth strategy that encouragedgovernments to set up disequilibria that would stimulate effort andmobilise hidden and under-utilised resources. It is an approach to devel-opment problems that embodies respect for complexity and an open-ness to the possibility of genuine novelty: what Hirschman (1971, p.27)once called ‘the discovery of an entirely new way of turning a historicalcorner’. It is submitted that the comparative institutional approach dis-cussed in this chapter can be applied in a way that embodies a similaropenness to the possibilities of alternative local governance mechanismsin general, and networking in particular.


There is a longstanding interest in Australia in assessing the perfor-mance of the local public sector, and in identifying the likely determi-nants of performance variation, both across jurisdictions and throughtime. Such interest is well placed since the performance of the localpublic sector has a significant impact on the overall performance ofthe economy in at least two ways. First, Australian local governmentis an important provider of final outputs in the form of environmen-tal management and health services, recreation and leisure services,and community services, amongst others. Second, a number of inter-mediate outputs provided by local government are also relied upon asinputs or resources in private production. These include waste man-agement and recycling services, planning and development servicesand the provision of essential infrastructure such as water supplies andlocal roads.

Performance information, particularly measures of comparativeperformance, have been seen as a means by which interested parties cangauge the provision of local government services in this regard. Thepotential users of this information are threefold. Firstly, the recipients(clients, users, customers or consumers) of these services can use thispublicly available information to exercise choice more effectively, andensure the transparency and accountability of service providers for tax-payer funds. Secondly, the providers or purchasers of services, govern-ments, departments and service providers, can also make use ofperformance measures. Possible uses include the stimulation of policydevelopment by highlighting influences on the operating environment,facilitating the monitoring of public sector managerial performance,

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L O C A L G O V E R N M E N T E F F I C I E N C Y M E A S U R E M E N T

Andrew Worthington

and the promotion of ‘yardstick’ or benchmark competition forimproving performance in areas where there is little competition inmarkets for resources (or inputs) and/or services (or outputs). Thesemeasures can also be used as an analytical tool in examining relation-ships between alternative agencies and programs and as a means ofassisting resource allocation by way of linking allocated funding withagency and/or program objectives. Finally, performance measurementcan be used as a managerial decision-making tool. Attention can there-by be focused on practices in similar organisations that may assist theattainment of agency/program objectives, and thus facilitate programsof performance improvement.

One of the most popular concepts in local public sector perfor-mance measurement is the notion of productivity. In a single-resource, single-service sector, productivity is simply measured as theratio of a service provided to the resource consumed. The larger theratio, the better the performance. And as a relative measure of per-formance it can be used to make useful comparisons across the sameor different local governments at a point in time and points throughtime. For example, the performance of a given local government (asmeasured by productivity) in 2002 could be measured relative to itsown performance in 2001 or it could be measured relative to otherlocal governments in 2002. But while this appears simple, local gov-ernments, like most public sector entities, provide multiple services(or outputs) and use multiple resources (or inputs) and the complex-ities of calculating multi-dimensional measures means that many par-ties interested in productivity comparisons rely upon partial measuresof productivity. Common partial measures of productivity include thequantity of a single service provided per employee or the dollar costsper service provided.

The comparative performance indicators provided by the variousstate departments of local government in Australia are almost exclu-sively partial measures of productivity [see, for example New SouthWales’ Department of Local Government (2001) and Victoria’sDepartment of Infrastructure (2002)]. These can, and do, provideinsights into local government performance but they do not accurate-ly reflect the complexity of local government decision-making regard-ing both the use of resources and the provision of services. Forexample, one measure of service or output used in assessing the per-formance of library services is the number of library issues divided bythe number of library staff. While informative, this measure does not

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reflect the fact that people also use libraries to read newspapers/mag-azines, access the Internet or CD-ROMS, use word processors andmake reference desk inquires. Likewise, the measure does not reflectthe choice of a library to use capital (such as automated lending, com-puters or mobile-libraries) over labour in providing these services.

Notwithstanding these obvious limitations of partial productivitymeasures, productivity itself can be problematic because it dependsupon the structure of the service provision technology used, the effi-ciency with which the technology is implemented, and the character-istics of the operating environment in which service provision occurs.Accordingly, productivity may vary across different local public sectorproviders because new technologies change the way services are pro-vided or because the operating environment makes it inherently moredifficult (and costly) to provide these services. This type of thinkingunderlies the way in which local government performance compar-isons are usually made among local governments in similar sorts ofoperating environments (say, rural, regional and urban local govern-ments), rather than across all local government jurisdictions.

The key here is efficiency measurement, which involves a compar-ison between the observed and theoretically optimal values of servicesand resources given the available technology, and which may or maynot take allowance of the differences in operating environments. Inother words, efficiency describes how well organisations use theirresources in producing services and can take the manner of anabsolute measure of performance. This can take a variety of forms,including comparisons in terms of service and resource quantities(such as maximising the quantity and/or quality of services and min-imising the quantity and/or quality of resources) or economic goalsor constraints (such as minimising the dollar cost of services or max-imising revenues associated with services), and these can provideanother useful tool for evaluating local public sector performance. Infact, efficiency measurement has already attracted the attention of agrowing number of Australian reviews, reports and inquiries con-cerned with improving public sector performance [see, for instance,Industry Commission (1997), Steering Committee for the Review ofCommonwealth/State Service Provision (1997; 1998), IndependentPricing and Regulatory Tribunal (1998) and Local GovernmentPublic Inquiry (2001)]. This chapter presents a discussion of some ofthe important issues likely to arise in calculating efficiency measuresfor local government and a representative sampling of some of the

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more recent evidence regarding local public sector performanceassessment in this regard.

The chapter itself is divided into six main areas. The first sectionbriefly outlines the theory of efficiency measurement. The second sec-tion provides a synoptic review of the different techniques for themeasurement of local public sector efficiency. The third sectiondescribes the ways in which the public sector provision of services dif-fers from the private sector and the implications for efficiency mea-surement, and the fourth section deals with the literature on theempirical measurement of inefficiency in local public services. Thefifth section discusses the determinants of local government efficien-cy. The chapter ends with some concluding remarks.

T H E T H E O R Y O F E F F I C I E N C Y M E A S U R E M E N T

There are three main measures of efficiency. Firstly, technical or pro-ductive efficiency refers to the use of productive resources in the mosttechnologically efficient manner. Put differently, technical efficiencyimplies the maximum possible output from a given set of inputs or theminimum possible inputs for a given level of output. Secondly, alloca-tive efficiency involves selecting that mix of inputs (e.g. labour andcapital) that produces a given quantity of output at minimum cost.That is, allocative efficiency chooses between the different ways inwhich a technically efficient level of output can be produced, and bytaking into account the different prices of these inputs reflects theleast costly combination. If a given local government uses its resourcescompletely allocatively and technically efficiently, then it can be saidto have achieved total or overall economic efficiency. Alternatively, tothe extent that either allocative or technical inefficiency is present,then the organisation will be operating at less than total economicefficiency.

It is important to realise that efficiency and productivity have bothshort run and long run interpretations. For instance, a particular localgovernment may be technically efficient in the short-run, but may stillbe able to improve productivity by exploiting scale economies in thelong run: that is, changing the scale of operations to achieve maxi-mum possible productivity. Likewise, the technology employed toprovide services will also change and this may also permit improve-ments in productivity. Accordingly, in the long run productivity gainscan normally be decomposed into improvements in productivity asso-ciated with technical change, improvements associated with technical


efficiency and improvements associated with increasing scale efficien-cy. Nevertheless, it is often difficult to quickly alter the scale of oper-ations, especially in local government when the scale of operations isdetermined exogenously by its jurisdictional characteristics.

The empirical measurement of economic efficiency then usuallycentres on determining the extent of either allocative efficiency ortechnical efficiency or both in a given local government or a givengroup of local governments. Depending upon the technique used,both interjurisdictional and intrajurisdictional comparisons can usual-ly be made. Researchers have employed production possibility fron-tiers, production functions and cost functions in their attempts tomeasure efficiency in actual organisations and industries. Productionpossibility frontiers map a locus of potentially technically efficient out-put combinations an organisation is capable of producing at any pointin time. To the extent an organisation fails to achieve an output com-bination on its production possibility frontier, and falls beneath thisfrontier, it can be said to be technically inefficient. Similarly, to theextent to which it produces some combination of goods and serviceson its production frontier, but which do not coincide with the wantsof its clients (usually expressed in terms of the prices they are willingto pay), it can be said to be allocatively inefficient. Production func-tions provide an analogous means of relating inputs to outputs in aproduction process by including input prices. Cost functions trans-form the quantitative physical information in production frontiersinto monetary values. Cost functions can thus convey informationabout the allocative and technical efficiencies of organisations in pecuniary terms.

Accordingly, if we can determine production frontiers, productionfunctions, or cost functions that represent total economic efficiencyusing the best currently known production techniques, then we can usethis idealised yardstick to evaluate the economic performance of actualorganisations and industries. By comparing the actual behaviour oforganisations against the idealised benchmark of economic efficiency wecan determine the degree of economic efficiency exhibited by some real-world agency such as a local government. One approach to establishingthis benchmark is the use of least squares econometric techniques (LS)whereby a line of best fit establishes an average level of performance.Another is to use only organisations that are operating at the frontier asthe standard of performance. This general approach to efficiency mea-surement has been termed the ‘deterministic frontier approach’ (DFA).

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However, it may well be that deviation away from a given efficiency fron-tier may be due not to inefficiency by the organisation in question butrather to external factors beyond its control. This has led to the devel-opment of the ‘stochastic frontier approach’ (SFA), which seeks to takethese external factors into account when estimating the efficiency of agiven real-world organisation.

In contrast to both the DFA and SFA techniques, which attemptto determine the absolute economic efficiency of organisations againstsome given benchmark of efficiency, the ‘data envelopment analysis’(DEA) approach seeks to evaluate the efficiency of an organisation rel-ative to other organisations in the same industry. DEA thus calculatesthe economic efficiency of a given organisation relative to the perfor-mance of other organisations producing the same good or servicerather than against an idealised standard of performance. An impor-tant variant of the DEA methodology sometimes employed in theanalysis of economic efficiency in the public sector is known as the‘free-disposal hull’ (FDH) approach. This technique has the advan-tage of being able to determine existing best-practice in an industryon the basis of fewer observations and it does not assume the exis-tence of many different ways of producing some good or service. Wewill return to these five different methods of measuring efficiency inour discussion of the empirical measurement of inefficiency in localpublic services. More detailed analyses of the theoretical foundationsof microeconomic efficiency measurement may be found in Fare,Grosskopf and Lovell (1994), Coelli et al. (1997) and Blank (2000).

E F F I C I E N C Y M E A S U R E M E N T T E C H N I Q U E S

As discussed, at least five principal methods have been used to mea-sure efficiency in local government. These are: (i) least squares (LS)econometric production models; (ii) the deterministic frontierapproach (DFA); (iii) the stochastic frontier approach (SFA); (iv) thedata envelopment analysis approach (DEA); and (v) free-disposal hullapproach (FDH).

To start with, for much of the history of production analysis, onefocus of analysis has been on traditional least squares (LS) economet-ric production models by which estimated functions of interest passthrough the data. For example, in a cost function, costs are specifiedas the dependent variable in a regression against output quantitiesand input prices, while for a profit function approach profits areregressed against input and output prices. While no strict behavioural


assumptions are made in regard to production functions, the behav-ioural assumption underlying the specification of a cost function iscost minimisation, while an assumption of profit maximisation ismade for profit functions.

Irrespective of the model actually specified, the line of best fitalways defines the standard of performance against which all organi-sations within a sample are compared. For example, most studies usea simple Cobb-Douglas or translog cost function to estimate the effi-ciency of local authorities. The efficiency measures themselves are cal-culated from the residuals of the regression equations, with positiveand negative residuals indicating authorities with costs that were high-er or lower than the predictions associated with the cost function.

Unfortunately, while least squares econometric production mod-els (LS) are well within the computational abilities of most researchersand all statistical programs, for the purposes of efficiency measure-ment the resulting average function can be a misleading indicator ofefficient production possibilities in both theory and practice. In prac-tice, the emphasis on average performance serves to institutionaliseinefficiency: that is, the average standard acts as a disincentive toimprovements in performance. And in theory the concept of an aver-age production function is largely inconsistent with the notion of anyform of maximising behaviour that may be expected to hold withinmost, if not all, production processes.

As a result of this fundamental limitation, the focus of the morerecent development of efficiency measurement has been on the evoca-tive term ‘frontier’. That is, interest is now placed upon extreme val-ues and bounding functions, rather than those of central tendency andbest fit. Thus, production may take place below or on the frontier, butat no points beyond it. This is the primary departure point from theLS approach to efficiency measurement and has been manifested inboth the statistical (DFA and SFA) and non-statistical (DEA andFDH) approaches to efficiency measurement. It is also a logical exten-sion since frontier performance comparison flows directly from thedefinition of a production function itself. Put simply, if production isa process of physical transformation whereby inputs are translated intooutputs, then the production function should be interpreted as apurely technical relationship that defines efficient transformation pos-sibilities, given the feasible set of technology. Specified rates of outputthereby correspond to given factor inputs and they may be said to rep-resent solutions to a technical maximisation problem.

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In the process of econometric analysis being brought to bear onthe investigation of the structure of economic frontiers, a number ofbroad distinctions or approaches have also been made. The first fun-damental distinction is between statistical and nonstatistical approach-es to production frontiers. Following Schmidt (1985, p.295), ‘... astatistical approach depends on assumptions about the stochasticproperties of the data, while a non-statistical approach does not’.Within this distinction, Schmidt (1985, p.295) argues that differencesmay be reflected in:

[W]ays that are trivial (e.g. an econometrician speaks of ‘esti-mating’ inefficiency while a management scientist speaks of‘measuring’ it) and in some ways that are not (e.g. a statisticalanalysis should yield standard errors for its estimates, while anon-statistical analysis cannot).

The second fundamental distinction is between the econometricapproach to the construction of frontiers (DFA and SFA) and whatmay be termed the mathematical programming approach (DEA andFDH). As a general rule, the econometric approach represents a sig-nificant modification to conventional econometrics, whilst the math-ematical programming approach as an inherently bounding techniquerequires little or no modification in the analysis of production fron-tiers. The two approaches also use different techniques to envelopdata, and therefore make different accommodations for random noiseand for flexibility in the structure of the production technology. Andall other things being equal, the econometric approach is stochastic,attempting to distinguish the effects of random noise from the effectof inefficiency, and parametric, combining the effects of a misspecifiedfunctional form with inefficiency, whilst the mathematical approach isnonstochastic and nonparametric. These differences between the twoapproaches serve as a suitable framework for future discussion,although, as we shall see, attempts have been made to make theeconometric approach more flexible in its parametric structure, andthe programming approach more stochastic.

First, the econometric approach is stochastic and thus noise can beseparated from the inefficiency measure while the mathematicalapproach is non-stochastic (or deterministic) and it is impossible toclearly distinguish between noise and inefficiency. The exception tothe stochastic properties of the econometric approach (as epitomisedin the SFA) is the earlier work encompassed in the deterministic


frontier approach (DFA). In that instance, all deviation from the esti-mated frontier is interpreted as inefficiency, and no allowance is madefor either measurement or misspecification error. However, apartfrom this distinction the DFA and SFA are remarkably similar since aseconometric techniques both can be employed to conduct conven-tional tests of hypotheses.

Second, the econometric approach is parametric, thus suggestingthat a functional form is required, and thereby risks the problem ofspecification error. This holds for both the DFA and SFA methods.This is an important consideration because in many contexts the normal axioms of productive activity (i.e. cost minimisation, profitmaximisation, etc.) may break down. Contrary to this, the mathemat-ical approaches (namely DEA and FDH) are non-parametric, and thuslargely avoid the problem of mispecification [FDH differs from DEAonly in that it has even less restrictive assumptions]. This has widenedtheir appeal in public sector applications. However, to compute this alarge amount of data is required to ensure that the majority of effi-ciency points are considered and, as nonstochastic techniques, both ofthese methods are particularly susceptible to measurement error andthe presence of outliers.

With the exception of the largely obsolete least squares (LS) anddeterministic frontier (DFA) econometric methods, the present sec-tion has addressed two separate, though conceptually similar, theoret-ical approaches to the assessment of efficiency. These are thestochastic frontier approach (SFA) and the mathematical program-ming DEA approach (including FDH). Whilst the selection of anyparticular approach is likely to be subject to both theoretical andempirical considerations, it may be useful to summarise the strengthsand weaknesses of each technique. The emphasis here is not on select-ing a superior theoretical approach, rather it should be emphasisedthat the SFA and DEA approaches address different questions, servedifferent purposes and have different informational requirements.

The most commonly used approach, namely data envelopmentanalysis, differs from the econometric approaches to efficiency mea-surement in that it is both nonparametric and nonstochastic. Thus,no accommodation is made for the types of bias resulting from envi-ronmental heterogeneity, external shocks, measurement error, omit-ted variables, etc. Consequently, the entire deviation from thefrontier is assessed as being the result of inefficiency. This may leadto either an under or over-statement of the level of inefficiency, and

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as a nonstochastic technique there is no possible way in which prob-ability statements of the shape and placement of this frontier can be made. In view of erroneous or misleading data, some critics ofDEA have questioned the validity and stability of measures of DEAefficiency.

However, there a number of benefits implicit in the mathematicalprogramming approach that makes it attractive on a theoretical level.Given its nonparametric basis, it is possible to considerably vary thespecification of inputs and outputs, the formulation of the productioncorrespondence relating inputs to outputs, and so on. Thus, in caseswhere the usual axioms of production activity break down (i.e. profitmaximisation) then the programming approach may offer usefulinsights into the efficiency of these types of industries. This is espe-cially the case with local public sector activities. Similarly, it is entire-ly possible that the types of data necessary for the statisticalapproaches are neither available nor desirable, and therefore the impo-sition of as few as possible restrictions on the data is likely to be mostattractive.

The second approach examined, namely the stochastic frontier(SFA), removes some of the limitations of DEA. Its biggest advantagelies in the fact that it introduces a disturbance term representingnoise, measurement error, and exogenous shocks beyond the controlof the production unit. This in turn permits the decomposition ofdeviations from the efficient frontier into two components, inefficien-cy and noise. However, in common with other econometric approach-es, an assumption regarding the distribution (usually normal) of thisnoise must be made along with those required for the inefficiencyterm and the production technology. The main effect here is that,when using the stochastic frontier approach, considerable structure isimposed upon the data from stringent parametric form and distribu-tional assumptions.

Notwithstanding these comments, stochastic frontiers and DEAshould be thought of as complementary tools in the analysis of localpublic sector efficiency. In both cases it is possible to think of the cal-culated and estimated production frontiers as being the maximal out-put that can be obtained given a set of input quantities and prices. Butit is also possible to think of the maximum as being taken with respectto either those local governments in the sample (as with DEA), orwith respect to all local governments that could conceivably exist andstill embody the current technology (as with the stochastic frontier).


In the first instance, the frontier adheres closely to the notion of best-practice efficiency, whereas in the second it refers to an absolute mea-sure of efficiency. Clear advantages thereby accrue to DEA inidentifying benchmark local governments and peer groups for com-parison, while the stochastic frontier permits the opportunity fordirect comparison with other institutional milieus.

P R O B L E M S I N M E A S U R I N G L O C A L G O V E R N M E N T E F F I C I E N C Y

There are several distinguishing characteristics that set public sectorservice provision apart from private sector service provision. Thesepresent a problem for efficiency measurement in two regards. First,most of the efficiency measurement techniques discussed in this chap-ter were originally developed in the context of private sector provisionand later adapted for use in the public sector. Accordingly, some of thebehavioural assumptions underlying these techniques may be inap-propriate or difficult to interpret in a public sector context. Second,some of the inherent characteristics of local public sector provisionmake interjurisdictional and/or intertemporal performance compar-isons difficult.

To start with, it goes without saying that the public sector differsfrom the private sector. In the private sector it has long been assumedthat, in the long run, the discipline imposed by the marketplace moti-vates firms to strive for cost efficiency and profit maximisation, facilitat-ed by feedback from the markets for capital, corporate control andmanagerial labour. These include measures derived from profits, rates ofreturn on assets, investment and invested capital, market share and mar-ket power. In contrast, the public sector is generally seen to lack bothan analogue for profit-seeking behaviour and an adequate feedback sys-tem to assess the quality of decisions. It is argued that there are fivemain aspects of government services that may make it difficult to devel-op and implement performance measures, including measures of effi-ciency. First, the outputs of a service provider may be complex and/ormultiple (Mark 1986; Hatry and Fisk 1992). Furthermore, there maybe difficulty in establishing cause and effect between the activities of aservice and the final outcomes it seeks to influence, and these may beevident only after considerable time (SCRCSSP, 1997 p.7).

Second, government organisations may encounter problems inidentifying the cost of producing and delivering services (Ammons

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1986, 1992; Ganley and Cubbin 1992). For example, there may bedifficulty apportioning costs across different services or the costs of agiven program over long periods of time. Certainly, this problem hasbeen mitigated by the introduction of systems of managementaccounting and accrual accounting (SCRCSSP 1997 p.7). Third,complexity in government services may exist due to the interplay ofrelated services and programs (Epstein 1992; Carter, Klein and Day1995). For instance, performance indicators may need to capture thepositive and negative spillover effects of service provision (SCRCSSP1997, p.16).

Fourth, there are potentially many users of governmental perfor-mance information. Different lines of accountability and the disparateinformational requirements of government, taxpayers, employers, staff,consumers and contractors create additional complications in perfor-mance measurement (SCRCSSP, 1997 p.16). For example, theIndustry Commission’s (1997 p.58) report on Australian local gov-ernment performance indicators received a number of submissions suggesting that the ‘most relevant measure for the Commonwealthand state governments may be a financial measure, but for local gov-ernment and its community stakeholders it is [the focus] on outcomemeasurements and the effectiveness of resource inputs’. Finally, a num-ber of restrictions placed by these stakeholders may impinge upon thetheoretical ability of government entities to improve efficiency, andtherefore bring the orientation of performance information into ques-tion. For example, Ammons (1986 p.191) argued that the intergov-ernmental mandating of expenditures and intergovernmental grantprovisions may restrict the ability of government bodies to modifybehaviour, whereas Miller (1992) maintains that the budget processitself has an important contribution to the notion of performance.

These characteristics almost invariably manifest themselves in thedata available to researchers in order to conduct performance mea-surement in general and efficiency measurement in particular. This isimportant because the confidence we have in the findings of suchassessments depends, or should depend, on the quality of the underly-ing data. One major data problem is that it is difficult to define, andtherefore measure, the services being provided. For example, shouldlocal public sector output encompass the final public service it providessuch as health and wellbeing, cultural and intellectual development,sense of community, economic development and overall communitysatisfaction? Or, as is more commonly the case, should it rely upon the


intermediate public services that are generally more measurable such asthe number of users of community health and library services, the areaof parks and gardens, the number of development and building appli-cations processed and the length of sealed roads?

A second data problem is that the input and output prices that arefrequently employed as weights to construct aggregate resource orservice indices in the private sector are frequently missing in the pub-lic sector. The prices of particular local services may be obscured ingeneral expenditure or it may be difficult to elicit the community’spreferences for one type of services over another and therefore deter-mine the optimal mix of output. Ideally, data collection would includenot only the quantities of services provided and resources consumed,an operating budget or both, but also service prices if charged alongwith resource prices. Finally, for most local public services quality, aswell as quantity, matters. Not only is quality inherently difficult todefine, let alone measure, but also many aspects of quality, while val-ued by users, are unpriced. For example, the quality of a library’s col-lection will indeed vary and could be measured, but additional aspectsof quality such as waiting times for reference services, pleasant sur-roundings and opening hours may be less tangible. Two or more mea-sures indicators of service provision quality are then required.

S T U D I E S M E A S U R I N G E F F I C I E N C Y I N L O C A L P U B L I C S E R V I C E S

As we have seen, at least five different approaches have been employedin the analysis of local public sector efficiency. These are: (i) leastsquares econometric production models (LS); the deterministic fron-tier approach (DFA); (ii) the stochastic frontier approach (SFA); (iii)the data envelopment analysis approach (DEA); and (iv) the FreeDisposal Hull approach (FDH). Details of some of these approachesare provided in Table 10.1.

Firstly, as observed earlier, some of the earliest work undertakenconcerning local government efficiency measurement is within the con-text of the long-established least squares econometric techniques. Inthis approach, negative deviations from the line of best fit are interpret-ed as representing entities that are less-efficient than average, while pos-itive deviations represent entities that are more-efficient than average.Examples of work in this area include Cubbin et al. (1987), Dombergeret al. (1988), Deller, Chicoine and Walzer (1988) and Deller andRudnicki (1992). Secondly, the deterministic frontier approach is an

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econometric technique that assumes that all deviations from the frontierare the result of inefficiency: that is, inefficiencies are embedded in astrictly one-sided disturbance term. Studies by Bjurek, Hjalmarsson andForsund (1990) and De Borger and Kerstens (1996a) have used thisapproach.

Thirdly, as we have seen, the stochastic frontier approach is also aneconometric technique, though it assumes a two-component errorstructure so that the inefficiencies usually follow an asymmetric half-normal distribution and the random errors are normally distributed.Examples of work in this area include Viton (1992), Deller andHalstead (1994) and Vitaliano (1997). Fourthly, in line with our ear-lier comments, the DEA approach is a mathematical programmingtechnique which assumes that all deviations from the estimated fron-tier represent inefficiency. This approach has been applied to localgovernments by Cook, Roll and Kazakov (1990), Rouse, Putterill andRyan (1995), Worthington (1999) and Worthington and Dollery(2002). Finally, as we have noted earlier, the FDH approach is a vari-ant of DEA that allows the assumptions concerning the productiontechnology to be kept to a minimum. Examples of work using thisapproach include Tulkens (1993), De Borger, Kerstens, Moesen andVanneste (1994) and De Borger and Kerstens (1996b).

Firstly, a number of studies have used stochastic frontiers (eithercost or production) to analyse the efficiency of the local public sector.For example, Hayes and Chang (1990) used a sample of 191 U.S.municipalities to test efficiency differences between ‘city manager’and ‘mayor-council’ forms of government. Formulating a cost fron-tier, they obtained total costs for three categories of local public sec-tor output (i.e. fire, police and refuse collection) and specified outputsin terms of the number of respective employees. The price of capitalwas proxied by the municipalities’ bond rating and the price of labourby the average municipal employee’s salary. They found that the meancost efficiency of mayor-council municipalities (84.78 per cent) washigher than that of city-manager type councils (81.21 per cent). Putdifferently, mayor-council municipalities could reduce costs by 15.22per cent and produce the same level of output, while city-managercouncils would need to reduce total costs by 18.79 per cent tobecome purely cost efficient.

Subsequent to Hayes and Chang (1990) a number of studies alsoexamined municipal service efficiency employing stochastic frontiers.Using this approach, Steven Deller made an extended inquiry into the


efficiency of municipal road services in both Illinois, Minnesota andWisconsin (Deller and Nelson 1991; Deller 1992; Deller, Nelson andWalzer 1992) and Maine, New Hampshire and Vermont (Deller andHalstead 1994). In the latter study a cost frontier was used, with thecost of capital proxied by the weighted average of new capital items,the price of labour by wages, and output by the length of roads undermunicipal jurisdiction. In the former studies, standard productionfrontiers were employed. In these cases there was an attempt to incor-porate quality considerations into municipal output, with roadsdefined as being gravel, or low or high-volume bituminous roads.Regional cost-of-living indices were also included. The resultantempirical evidence indicated mutatis mutandis that current expendi-tures on rural low-volume road service were unnecessarily highbecause of managerial inefficiencies: in particular, ‘efficiency measure-ments suggested that costs could be reduced, on average, to 45 percent of current levels’ (Deller, Nelson and Walzer 1992, p.364).

Secondly, an increasing number of studies have employed the non-parametric technique of data envelopment analysis to investigate localpublic sector efficiency. Cook, Roll and Kazakov (1990) used DEA tomeasure the relative efficiency of Ontario’s highway maintenancepatrols. The inputs in this case were patrol maintenance and capitalexpenditures (along with an allowance for environmental factors) andthe outputs were stipulated in terms of the characteristics of the roadsserviced and an accident prevention factor. The resulting efficiencyscores were then used to classify maintenance patrols into a number ofclasses for analytical purposes. One finding was that the technical effi-ciency of patrols where the proportion of ‘privatised’ work was 20 percent or more was higher than those patrols with less than 20 per centof privatised work.

An identical theoretical framework and sample was subsequentlyemployed in Cook, Kazakov, Roll and Seiford (1991), and Cook,Kazakov and Roll (1993). Bjurek, Kjulin and Gustafsson (1992) exam-ined the technical and scale efficiency of Swedish public day-care cen-tres. Inputs were defined in terms of the number of hours worked bypre-school teachers, nurses and cooking and cleaning staff, and outputsdenominated by the capacity of children, aged up to two years, andfrom 3 to 6 years. Hjalmarsson and Veiderpass (1992) examined theefficiency of 285 Swedish public electricity distributors. Inputs includ-ed the discretionary levels of labour, and the non-discretionary lengthof transmission lines and transformer capacity, and the outputs were

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specified in terms of both volume of kilowatts and the number of cus-tomers. Hjalmarsson and Veiderpass (1992) found only modest effi-ciency differences between public and private electricity distributors.

Rouse, Putterill and Ryan (1995) also used DEA in a study ofNew Zealand local authority road maintenance. Conceptually verysimilar to the earlier stochastic frontier work of Deller (1992) and thenonparametric approaches of Cook, Roll and Kazakov (1990) andCook, Kazakov, Roll and Seiford (1991), the study incorporated envi-ronmental factors as major cost and process drivers. The empiricalanalysis contained an index of road surface defects and a measure of‘roughness’ for both urban and rural roads. For the measuresobtained under the assumption of variable returns-to-scale, 39 of apossible 62 transport local authorities were judged to be 100 per centtechnically efficient, with 12 below 70 per cent, and the remainderbetween 70 and 100 per cent efficiency.

Finally, more recent work has employed the FDH approach toefficiency measurement, and has been based largely on studies ofBelgian municipalities, with a focus on cost efficiency. De Borger andKerstens (1996, p.149) argue that this approach is closely related tothe nature of the data:

A consequence of the Belgian institutional framework is thatthe sample does not contain input price variability. There is nowage flexibility as salary scales of municipal personnel are com-pletely fixed. Moreover, all municipalities have access to thesame capital market, and in fact obtain most of their fundsfrom one and the same specialised financial institution.Therefore, the assumption of identical input prices acrossmunicipalities may not be too unreasonable. Consequently,throughout the analysis we focus on the measurement of costefficiency.

Within this approach, and those followed by Vanden Eeckaut,Tulkens and Jamar (1993) and De Borger and Kerstens (1996a,1996b), the inputs into the FDH model are total municipal expendi-tures. The outputs are denoted in terms of variables intended toreflect the responsibilities of Belgian municipal governments. Theseinclude total population, length of roads, number of persons agedover 65 years, those living on subsistence grants, the number of stu-dents enrolled in local public schools, and the maintenance of recre-ational facilities. The results indicate that mean relative cost efficiency


scores range from 0.57 to 0.94. Put simply, inputs (and thereforecosts) could be reduced anywhere from 6 per cent to 43 per centacross Belgian councils. Moreover by using FDH, the measure of per-formance is drawn from the actual sample so that cost-efficient coun-cils can easily be identified for benchmarking. In addition, productiveefficiency frameworks have also been used to test the relative efficien-cy of the same sample of Belgian municipalities. De Borger, Kerstens,Moesen and Vanneste (1994) employed an analogous conceptualisa-tion of outputs, although inputs were measured in terms of white andblue-collar employee and capital stock (proxied by the surface area ofmunicipal-owned buildings). Significantly, De Borger and Kerstens(1996a; 1996b), amongst others, attempt to incorporate the multipleoutputs produced by Belgian municipal governments into a singlemeasure of efficiency. This stands in stark contrast to the other workon public sector efficiency which focused on specific aspects of serviceprovision, such as roads, schools, welfare services and transportation[see, for example, Bjurek, Kjulin and Gustafsson (1992), Tulkens(1993), Rouse, Putterill and Ryan (1995)].

At least three aspects of the efficiency measurement of local pub-lic services deserve further attention. These are (i) the appropriate-ness and sensitivity of efficiency measures to the postulated referencetechnology, (ii) the appropriate treatment of non-discretionaryinputs/outputs in local public services, and (iii) the choice of inputor output orientation in efficiency measures. First, several studieshave analysed the efficiency of local governments using a broad vari-ety of reference technologies [see, for instance, Bjurek, Hjalmarssonand Førsund (1990), Vanden Eeckaut, Tulkens and Jamar (1993),and De Borger and Kerstens (1996a)]. In a study of Belgian munic-ipalities, De Borger and Kerstens (1996a) used both parametric(deterministic and stochastic frontiers) and non-parametric (FDHand DEA) methods to evaluate the sensitivity of the rankings ofmunicipalities with respect to the underlying reference technology.They observed that not only may the shape of the efficiency distrib-ution be affected by the use of different approaches, but that they canalso alter the implied rankings of individual observations. UsingSpearman rank correlation and Pearson product moment correlationcoefficients, they demonstrated that statistically significant differ-ences existed between FDH and DEA, whilst ‘DEA has a slightlyhigher similarity in ranking relative to the [parametric approaches]’(De Borger and Kerstens 1996a, p.159). The estimated range of

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mean efficiency scores also was quite large, with cost efficiency mea-sures between 0.59 and 0.83. Using these observations, De Borgerand Kerstens (1996a, p.167) concluded, ‘it would seem prudent toanalyse efficiency questions using a broad variety of methods tocheck the robustness of the results’.

Vanden Eeckaut, Tulkens and Jamar (1993) undertook a similarcomparison. However, their results were disaggregated on the basis ofexpenditure classifications, and thereby indicate how consistencybetween rankings may vary over the sample. Comparing FDH andDEA under variable returns-to-scale, constant returns-to-scale andnon-increasing returns-to-scale assumptions, they found that all threeDEA methods yielded similar results for large expenditure classmunicipalities. Some 15 to 22 per cent were found to be cost efficient.For the second expenditure class some divergence between the meth-ods was found, and accordingly, concordant rankings and mean effi-ciency scores were once again established.

Second, the standard Charnes, Cooper and Rhodes (1978) andBanker, Charnes and Cooper (1984) model formulations implicitlyassumed that all inputs and outputs are discretionary (i.e. controlledby the management of each municipality and varied at its discre-tion). In most circumstances we would expect that this assumptionwould not hold for the local public sector. For example, in a techni-cal efficiency formulation the geographic, environmental and demo-graphic characteristics of a given municipal area are important inputsinto the process of providing local public services, yet they are alsoexogenously fixed and thereby nondiscretionary. Alternatively, in acost efficiency model [such as those employed by De Borger andKerstens (1996a)] the outputs of the local public sector relatedirectly to the demographic and socioeconomic characteristics of themunicipality. The usual case is that these outputs, both quantita-tively and qualitatively, are largely imposed by some minimum stateor national legislation.

Two approaches are available to purge efficiency measures of theseexogenously fixed nondiscretionary inputs and/or outputs. The firstmethod is to incorporate these assumptions into a single-stage proce-dure following Banker and Morey (1986) and Golany and Roll(1993). Efficiency measures thus obtained are based on the premisethat for an input(output)-oriented model, it is not relevant to max-imise the proportional decrease (increase) in the entire input (output)vector. Rather, maximisations should only be determined with


reference to the sub-vector that is composed of discretionary inputs (outputs). Examples of this approach include Worthington’s (1999)analysis of local government libraries, where the nondiscretionaryinputs include socioeconomic, demographic and geographic charac-teristics and Worthington and Dollery’s (2002) study of local govern-ment’s planning and development function. In this instance, thenon-discretionary inputs included the population growth and distrib-ution and an index for heritage and environmental sensitivity.

The second method uses a ‘two-stage approach’. In the first stage,a frontier model in which only factors under a municipality’s controlare included as inputs is used to compute efficiency scores. In the sec-ond stage, those efficiency scores obtained are regressed on factorsbeyond a municipality’s control. The difference between the comput-ed efficiency score from the first stage and its predicted value formsthe second stage. The residual is used as an index for measuring ‘pure’technical efficiency, which could be attributable to management.Examples of this kind of work include De Borger and Kerstens(1996a) and Worthington and Dollery (2002).

In their analysis of Australian local government’s planning andregulatory function, Worthington and Dollery (2002) conclude thatwhile there is overwhelming theoretical evidence that all inputs andoutputs, both discretionary and nondiscretionary, should be includedin efficiency analyses, reconciling the two approaches is more difficult.Rouse et al. (1996, p.22), for example, argues that ‘…policymaker’sattitudes [to environmental factors must be clearly understood]before any firm conclusion is reached on the choice of methodologyand interpretation of results’. Accordingly, there is considerable vari-ation in the existing literature as to how nondiscretionary factors areincorporated in efficiency measures.

The final issue revolves around the selection of an input or outputorientation in efficiency models. For instance, in an input orientation,focus falls on the proportional reduction of inputs to achieve efficien-cy, whereas in an output orientation, emphasis is placed on the pro-portional augmentation of outputs. Although many contributions tothe performance literature on the local public sector have focused oninput efficiency measures [see Hayes and Chang (1990) and VandenEeckaut, Tulkens and Jamar (1993)], the use of the output orienta-tion is not unknown [see, for example, Deller (1992)]. Whilst theexact formulation will depend on a particular empirical context, DeBorger and Kerstens (1996b, p.11) reason as follows:

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In principle, the choice of orientation should be inspired bythe postulated underlying behavioural mode. If one assumesthat local governments take outputs as exogenous (for exam-ple, determined by citizen’s demand) and have substantialcontrol over inputs, then an input orientated measure seemsappropriate. Input measures can then detect failures to min-imise costs resulting from discretionary power and incompletemonitoring, and provide an indication of possible cost reduc-tions. If on the other hand municipalities have limited controlover inputs and face fixed budgets, then an output-orientedapproach may be quite informative. Output measurement canthen identify municipalities that fail to maximise the quantityof the local public services subject to the budget they face, andprovide indications of the increase in outputs that couldpotentially be realised.

D E T E R M I N A N T S O F L O C A L P U B L I C S E C T O R E F F I C I E N C Y

In contrast to other areas where frontier efficiency measurement tech-niques have been employed, hypotheses to explain variation in localpublic sector efficiency are relatively underdeveloped. However, threeexceptions should be noted. These include empirical research relatingto the impact of political factors, community characteristics, and theimpact of financial structure on local public sector efficiency.

Firstly, a number of studies have postulated a relationship betweenthe political composition of the municipal council and the level of effi-ciency. For example, Vanden Eeckaut, Tulkens and Jamar (1993) gen-erate evidence for the case that political majorities are an explanatoryfactor for observed inefficiencies. Using municipalities in the (French-speaking) Région Wallone area of Belgium, they obtained data on thethree major national political parties (Parti Socialiste, Parti SocialChrétian, and Parti Réformateur Liberal) and local parties, and cate-gorised municipalities in terms of coalition composition, party major-ity and strength and mayoral affiliation. Their results indicate that theproportion of inefficient municipalities is lowest for liberals andsocialists, followed by anti-socialist (majorities obviously formed toexclude socialists), local parties, and finally tripartite coalitions.However, municipalities with liberals and socialists in the majority alsohave the highest proportion of efficient municipalities ‘by default’:


that is, whilst they do constitute the frontier, they do not dominateany interior municipality. Vanden Eeckaut, Tulkens and Jamar (1993,p.317) note that ‘this finding qualifies somewhat the superiority oftheir performance relative to other parties’.

De Borger, Kerstens, Moesen and Vanneste (1994) furtheremphasised the contention that a politician’s emphasis on politicalrather than economic rationality is likely to contribute to inefficiency.They postulate that the influence of political agents on bureaucraticselection and the use of explicit and implicit log-rolling may be animportant factor in this process, which in turn is construed to be afunction of the size of political coalitions. Expounding no compellinga priori argument for party-related inefficiency, they incorporate aqualitative variable for liberal and socialist party coalitions, and aquantitative variable for the number of coalition partners in a tobitcensored regression model. The results indicate that the number ofcoalition partners does not exert an influence on municipal efficiency,although the presence of liberals tends to decrease technical efficien-cy, while the presence of a socialist party does not seem to have anystatistically significant effect.

Secondly, several studies have incorporated community characteris-tics in two-stage efficiency models. For example, De Borger andKerstens (1996a) incorporate the use of per capita income on thegrounds that ‘bureaucratic slack’ increases with organisational income.In other studies they also include the proportion of the populationwith a primary (De Borger, Kerstens, Moesen and Vanneste 1993) orhigher (De Borger and Kerstens 1996b) education qualification toquantify political participation. Only in the case of the latter is theirhypothesis (i.e. that education increases efficiency) confirmed. In theanalysis of a specific local government function, namely library services,Worthington (1999) specified municipal population and area, the pro-portion of the population from various groups (non-English speakingbackground, aged and students) and an index of socioeconomic disad-vantage as relevant community characteristics. Worthington (1999,p.41) concluded, ‘the study reinforces the importance of taking intoaccount the imposed conditions that impinge upon a given local gov-ernment’s ability to perform efficiently’.

Vitaliano (1997) used a stochastic cost frontier to analyse thetechnical efficiency of U.S. public libraries with an expanded set ofpublic choice-type determinants. These included the percentages oftotal funding derived from local sources, gifts and investments. His

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study concluded that ‘government-run libraries are 2.7 per cent moreinefficient than private not-for-profits. And donated resources andgreater reliance on local taxation are linked to less inefficiency’(Vitaliano 1997, p.640). Lastly, a number of studies use a broaddemographic indicator, either total population (De Borger, Kerstens,Moesen and Vanneste 1994) or population density (De Borger andKerstens 1996a). The basic argument is that a low population levelmay inhibit exploiting economies of scale in some or all of the pro-duction processes. Equivalently, the cost of provision will rise withlower population density. Both of these studies concluded thatincreases in actual population and population density are associatedwith improvements in efficiency.

The final set of explanatory variables employed relates to the fis-cal parameters of the local public sector. For example, high tax pricesmay enhance the monitoring process of constituents. Likewise, thewell-established and extensively surveyed fiscal illusion literatureindicates that misperceived fiscal parameters, like total per capita taxburdens or total expenditure outlay, may increase local expenditure,and accordingly be associated with inefficiency [see Dollery andWorthington (1996a)]. De Borger, Kerstens, Moesen and Vanneste(1994) and De Borger and Kerstens (1996a) use the size of inter-governmental grants to present a case for the influence of the flypa-per effect in particular. The results in both cases are generally similarto those of De Borger, Kerstens, Moesen and Vanneste (1994,p.353) where ‘grants may not only encourage local service provision,but that they also lead to some additional technical inefficiency…thelocal tax rates that we experimented with failed to produce significantestimates’.

Lastly, Worthington and Dollery (2000b) provide evidence con-cerning the interplay between the productive performance of localgovernments and the revenue-raising system under which they oper-ate. While this paper only addressed the issue of intergovernmentalgrants, it suggested that it was possible that other revenue-raisingdevices may also exert an influence on local government efficiency.For example, while rate revenue is subject to rate-pegging and othercontrols, fewer restrictions are placed on local governments’ use ofuser charges and fees and contributions. The growing importance ofalternative sources of revenue means that local governments may beable to prop up inefficient operations from sources other than grants.Alternatively, the use of user pays systems such as these may actively


promote efficient outcomes in local government services. Whetherthe level and composition of own-source non-rate revenue has a sys-tematic influence on productive efficiency is an empirical questionthat needs to be addressed.

C O N C L U S I O N

Whilst relatively underdeveloped, especially when compared to theextensive financial services literature, a good foundation for the mea-surement of local public sector efficiency has nevertheless been laid.Problems do remain. For example, issues concerning the appropriatebehavioural specifications to employ, problems with unmeasuredinputs and outputs, and the choice between alternative computation-al techniques have yet to be resolved. However, these are no moreinsurmountable than related issues that have arisen in the fields offinancial services, health and education, amongst others, where simi-lar identical efficiency measurement techniques have been gainfullyapplied. To some extent, the lessons learned from these areas serve asuseful pointers to solutions in the analysis of local public sector effi-ciency. That said, empirical analysis of local public sector efficiencysuggests that it is a unique product of complex non-discretionaryinputs and outputs and constraints, multiple inputs and outputs, andinherently complicated political, institutional and cultural factors.

What implication can then be drawn from the preceding discussionof efficiency measurement for practitioners and researchers in localgovernment? In the first place, despite significant technical advances inthe application of efficiency measurement techniques to the local pub-lic sector, as we have seen there are important caveats in the manner inwhich their results should be treated. For example, most efficient mea-surement methodologies embody both discretionary variables (i.e.those variables which can be controlled by management) and non-dis-cretionary variables (i.e. those variables which are exogenously deter-mined and cannot be influenced by management).

Obviously the spatial distribution of local government (with atten-dant differences in climatic conditions, socioeconomic characteristicsof the jurisdictional population, regional input price variations, etc.)and structural constraints imposed by higher levels of government(competitive tendering procedures, accounting methodologies, rate-capping, etc.) can greatly influence the efficiency of local governmentoperations. Likewise, the idiosyncrasies arising from elected municipal

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councils (political interference with operational matters, special inter-est considerations, etc.) imply that local government managers areonce again constrained by a host of non-discretionary factors in arriv-ing at efficient outcomes. Accordingly, frontier efficiency measure-ment techniques that do not explicitly acknowledge the significance ofthese factors should be treated with caution. Secondly, the complexpoliticised milieu of local government implies that the effectiveness ofservices is at least as important as economic efficiency in gauging thesuccess of specific municipalities facing different demands. Efficiencymeasurement is concerned only with the dimensions of economic effi-ciency and takes no account of the effectiveness of service provision.It is thus, in itself, only a partial view of the operations of councils.

Notwithstanding these caveats, efficiency measurement tech-niques are increasingly applied to local governments throughout thedeveloped world. The results of these statistical exercises will surelycontinue to show differences in efficiency within and between localauthorities. Moreover, critics of local government will doubtless seizeon results of this kind as a means of attacking existing service provi-sion and its management. Clearly, familiarity with efficiency measure-ment techniques and their drawbacks will assist local governmentpractitioners in dealing with this kind of criticism.


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TABLE 10.1 APPLICATIONS OF EFFICIENCY MEASUREMENT TECHNIQUES IN THE LOCALPUBLIC SECTOR


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NOTES

(a) DEA: Data Envelopment analysisFDH: Free Disposal HullSFA: Stochastic Frontier ApproachDRA: Deterministic Frontier ApproachLS: Less Squares Econometric Method(b) Singular dates represent calendar or financial year cross-sections, intervals represent time-series.(c) Ranked in order by paragraph.


The phenomenon of government failure, defined here as the inability ofa government agency or agencies in a given tier of government or in a fed-eral system of multi-tiered governments to intervene optimally in a mar-ket economy, is now a familiar area in policy analysis. In this chapter Iadvance the argument that not only is government failure an essentialdimension of policy making at all levels of government, but that cogentreasons exist for believing that the problem of government failure may bemuch more acute in local government than at higher tiers of governance.This argument runs counter to conventional wisdom amongst commen-tators on municipal policymaking, most notably the views of authoritativeBritish scholars Bailey (1999) and Boyne (1998). Moreover, I develop anew taxonomy of government failure in support of this thesis.

The application of the public choice approach to the public sectorhas generated various taxonomic systems of government failure. Forexample, perhaps the earliest typology of government failure was devel-oped by O’Dowd (1978, p.360) who argued that all forms of govern-ment failure fell into a generic tripartite classification containing‘inherent impossibilities’, ‘political failures’ and ‘bureaucratic failures’.A somewhat more recent and closely related taxonomy of governmentfailure has been advanced by Dollery and Wallis (1997) who argue thatit is possible to identify three main forms of government failure: legisla-tive failure, bureaucratic failure, and rent-seeking. But possibly the mostcomprehensive typology of government failure has been developed byWeisbrod (1978), who has advanced a fourfold classification whichcomprises legislative failure, administrative failure, judicial failure andenforcement failure.

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L O C A L G O V E R N M E N T FA I L U R E

Brian Dollery

The chapter itself is divided into three main parts. Section onefocuses on the typologies of government failure, which have been espe-cially constructed for local government by Boyne (1998) and Bailey(1999). A new fivefold taxonomy of local government failure is devel-oped in part two, which attempts to highlight the peculiar susceptibili-ty of this tier of governance to government failure. The chapter endswith some brief concluding remarks in section three.

T A X O N O M I E S O F L O C A L G O V E R N M E N T F A I L U R E

The literature contains comparatively few instances of the application ofpublic choice theory to a specifically local government context in thesense of developing a taxonomic theoretical system of government fail-ure, with some exceptions, most notably Boyne (1998) and Bailey(1999). In his Public Choice Theory and Local Government, Boyne(1998) develops a taxonomy of competitive categories in local govern-ment which can influence the degree of government failure at this levelof government. He distinguishes between ‘three distinct forms of com-petition’ in the local government arena. Firstly, there is ‘competitionbetween public organisations for a share of tax revenues and serviceresponsibilities’ (p.1). Secondly, political parties should compete for thepower to determine policy choices in local government jurisdictions.The final form of competition which can prevail in local government hasbeen described by Boyne (1998, p.1) as ‘competition between govern-mental and private organisations for control over the production ofpublic services’. Boyne argues that for effective Tiebout-style competi-tion to occur in the local government various conditions must be metto ensure that nature of this competition results in efficient outcomes,which are often ignored by public choice theorists. These conditionsinclude ‘horizontal fragmentation’ or a large number of local govern-ments at a given level of government, ‘vertical fragmentation’ in whichseveral tiers of government compete, and ‘substantial local autonomy’,where ‘local communities should have the discretion to innovate, exper-iment and develop distinctive policies’ (p.22).

Drawing on the work of Albert Hirschman (1970), Bailey (1999)approaches the question of government failure at the municipal levelfrom a somewhat different perspective. Hirschman (1970) developed theconcepts of ‘exit’ and ‘voice’ as alternative means by which consumers ofpublic services can influence the provision of these services and therebydecrease the degree of government failure they experience. In generic

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terms exit refers to the capacity of citizens to choose between alternativeproducers of some specified service. By contrast, voice refers to the abil-ity of consumers to express their preferences for a different mix or qual-ity of public services through various administrative mechanisms, likeelectoral voting, complaints to public service managers and customersurveys, without migrating away from their municipal jurisdictions.

As methods by which citizens can influence the extent of govern-ment failure at the local government level, both exit and voice have var-ious limitations. Bailey (1999, pp.47–48) identifies five maincharacteristics of local public services which can inhibit the effectivenessof voice in municipal affairs. ‘Legal and institutional barriers’ in the formof diluted political representation, electoral and procedural irregularities,inadequate public hearings, and so forth, can all serve to impede politi-cal attempts aimed at improving public services. ‘Information asymme-tries’ between public bureaucrats and citizens concerning the nature andcosts of public service delivery can also constrain the efficacy of voice.Where services are highly differentiated as, say, in the case of the qualityof education provided by different schools, voice by some citizens mayonly influence the behaviour of a particular school rather than the wholeschool system, in contrast to undifferentiated services where voice willhave more general effects. The socioeconomic characteristics of the pop-ulation in a particular jurisdiction may be a decisive factor, with better-educated, affluent groups more likely to express voice than their poorer,less educated counterparts. Finally, the greater the relative importance ofsome public service to the perceived welfare of a population, the moreimportant voice will be as a means of addressing government failure.

Exit is also subject to a number of constraints which are spelt out byBailey (1999, p.48). The non-excludability characteristic of public goodsmay preclude exit altogether when these are national public goods, andeven for some local public goods like poor environmental protection leg-islation may involve expensive relocation. Natural monopolies similarlypreclude exit where they cover large geographical areas. Legislative imped-iments to entry by alternative suppliers of a service may negate exit possi-bilities, as in the case of national telecommunication providers. In largecountries with uneven concentrations of population, such as Australia,Canada and the United States, large local government jurisdictions withsmall numbers of people may generate spatial barriers to exit. And lastly,imperfect information available to consumers may mean they are unawareof the relatively unattractive service provision they are currently receiving,and thus induce them to underestimate the benefits of exit.

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A N E W T A X O N O M Y O F L O C A L G O V E R N M E N T F A I L U R E

The various taxonomic systems of government failure which I havehighlighted shed considerable light on the numerous ways in which thisphenomenon can manifest itself in market economies characterised byrepresentative democracy. Moreover, it would appear that not only arethe generic forms of government failure ubiquitous in the sense thatthey apply to governance systems in all advanced countries, but thatthey also occur at all levels of governance in these countries. Needlessto add, the weight of evidence suggests that government failure is muchmore severe in developing societies than in their developed counterparts(Grindle, 1997), but either the fragility or absence of democratic insti-tutions in these nations would seem to imply that the origins of gov-ernment failure in the developing world are due to institutionalincapacity and dictatorship rather than the functioning of a sophisticat-ed democratic process. Nevertheless, with the significant exceptions ofBoyne (1998) and Bailey (1999), the extant taxonomies of governmentfailure discussed earlier are designed to apply to all tiers of governanceand contain no explicit suggestion that some levels of government maybe more susceptible to government failure than others. Moreover, eventhough both Boyne (1998) and Bailey (1999) direct their attentionexclusively at municipal governance, there is no indication that theybelieve local governments are especially predisposed towards govern-ment failure in comparison with higher levels of government. Indeed,both authors seem to think the relative ease of exit from local govern-ment jurisdictions should make municipalities rather less prone to gov-ernment failure than their more august counterparts.

In contrast to this literature, I contend that cogent reasons existwhich suggest that local governments are much more susceptible togovernment failure than higher levels of government. Furthermore,drawing on the existing taxonomic literature contributed by publicchoice theorists, I develop a new fivefold typology of government fail-ure in order to sustain this claim. In essence, I argue that at the level ofmunicipal governance, it is possible to identify five main forms of gov-ernment failure which, although they might also afflict federal and stategovernments, are nonetheless especially evident in the operations oflocal government. These kinds of government failure can be termed‘voter apathy’, ‘asymmetric information and councillor capture’, ‘irontriangles’, ‘fiscal illusion’ and ‘political entrepreneurship’. I shall exam-ine each of these proposed taxonomic categories in turn.


VOTER APATHY

A fundamental proposition of public choice theory holds that, in gen-eral, voting by citizens in political elections is an irrational activity sincethe process of voting is costly whereas the benefits associated with vot-ing are negligible (Aldrich, 1997). Yet obviously in the real world peo-ple do vote, although in many instances participation rates are low. Thisso-called ‘paradox of voting’ can be resolved if voting is viewed as a con-sumption activity. Moreover, in western societies the socialisationprocess strongly emphasises the civic virtues associated with politicalparticipation.

Although the conception of voting as a consumption activity maythus explain why people vote in elections, it cannot predict how voterswill choose between alternative options once they are inside the pollingbooth. The conventional analysis of this question focuses on the eco-nomic dimensions of the choice; voters weigh up the costs and benefitsof competing policy options and select the policy which maximises theirnet benefit in terms of outcomes (Mueller, 1989). However, morerecent literature on ‘expressive voting’ seems to indicate that the actualchoice of electors depends more on preferences for options rather thanoutcomes, where options do not consider the costs involved in out-comes (Brennan and Buchanan, 1984; Faith and Tollison, 1993).

Despite the undeniable fact that the right to vote plays a decisiverole in democracy, together with related constitutional rights, includingfree speech and freedom of association, the act of voting in democraticelections is fraught with ambiguities. For instance, the substantial costsof gathering and digesting information on competing candidates, alter-native policies, the costs and benefits of policy platforms, and the like,together with the fact the vote of an individual elector cannot realisti-cally influence electoral outcomes, means that most voters choose toremain ‘rationally ignorant’ on many of the issues involved. Similarly,voters typically play dual roles in the political process, acting both aspotential beneficiaries of public policies and as prospective financiers ofthese policies in their capacities as taxpayers.

Despite the centrality of voting in the democratic process, it is by nomeans the only element in collective decision making. Numerous othermechanisms exist, some of which I noted earlier in the discussion onHirschman’s (1970) ‘voice’ concept, which range from formal votingprocedures to opinion polls, protest meetings, petitions, ‘talkback’radio shows and the like. These alternatives to voting serve to diminishits significance in electors’ eyes and contribute towards low political

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participation rates, ill-informed voters, and the various other problemsassociated with elections under representative democracy.

Although the difficulties arising from voter apathy undoubtedly afflictboth the electoral process and its subsequent ‘responsiveness’ to the pref-erences of citizens at all levels of government, the problem seems to bemost acute local government. It is possible to identify several factors thatmay account for this observation. Firstly, and perhaps most importantly,in many local government systems, voters do not perceive periodic munic-ipal elections as politically significant events because the behaviour of localgovernments is severely constrained and manipulated by state and nation-al governments. Local governments simply ‘don’t matter in the schemeof things’. For example, Bailey (1999, p.265) notes that in Britain ‘by theearly 1990s, central government directly controlled about two-thirds oflocal government income and also had powers to cap local rates as well ashaving a significant influence on other revenue sources such as rents formunicipal housing’. It is thus hardly surprising that not only were voterturnouts low in British local government elections, but voters also seemedto view them ‘…as little more than opinion polls on the popularity of cen-tral government’ (Boyne, 1998, p.69). Similarly, with respect to NewZealand local government, Kerr (1999, p.4) has observed that ‘there is alow turnout at elections, usually no more than 50 per cent, despite postalvoting’. Even in the United States, where local governments enjoy con-siderable autonomy, voter apathy is most pronounced at the local level. Bycomparison, in state and national elections voter participation rates havegenerally been substantially higher (Loughlin, 1986), except in countrieswith compulsory voting, like Australia.

A second reason for greater voter apathy in local government electionsresides in the fact that in many countries these elections are not contestedalong party political lines, and even in those nations where political partiesdo participate, many candidates do not have party affiliation and partyaffiliations may in any event be much weaker than at the state or federallevels of government. Accordingly, voters do not have the informationalbenefits of party platforms to assist them in making informed choices. Forinstance, in the United States, political parties often play little formal rolein municipal elections largely because in many jurisdictions they aredebarred from participation as a consequence of the earlier ‘reform move-ment’ aimed at removing corruption from American urban politics(Hawley, 1973). Along similar lines, in many parts of Australia, includingregional and rural New South Wales, longstanding convention usuallyprecludes municipal candidates from adopting explicit partisan platforms.


Media reporting of local government elections is typically much lesscomprehensive and unquestioning than for comparable federal and stateballots and consequently affords voters much less opportunity tobecome well-acquainted with the policy platforms of individual candi-dates standing for election. Whether this is a cause or simply an effectof voter apathy is a moot point, but it nevertheless surely accounts fora greater degree of ill-informed voting in municipal elections than theircounterparts at higher levels of government.

Because of their lower public profiles and complicated interface,governance and management roles in municipal government are oftenconfused in the eyes of many citizens, who cannot readily distinguishbetween elected representatives and professional public servants. Thus,perceived responsibility for past policy successes and failures is difficultto assign between the councillors and managers. Moreover, the com-mittee systems characteristic of numerous local governments serve tofurther confuse the question of responsibility (Kerr, 1998).

Finally, the nature of local government activities itself makes anyevaluation difficult. Municipalities typically deliver a vast range of ser-vices, even where their focus is on the relatively narrow ‘services toproperty’ dimension of delivery. Under these circumstances, not only ismonitoring of service delivery an onerous task, but accountability isextremely difficult to establish. It is thus little wonder that citizensremain apathetic about the operations of local government.

The relatively high degree of voter apathy in local government, incomparison with its national and provincial counterparts, providesgreater scope for government failure at this level of governance. In gen-eral, it can be argued that apathetic voters might not only elect inade-quate representatives, but also fail to scrutinise their performance witha sufficient degree of rigour. For example, where voters are compara-tively ill informed about the election platforms of councillors they are ina poor position to judge whether subsequently elected candidates haveindeed met expectations or carried out their mandates. Similarly, givenaccountability and monitoring difficulties, citizens may experience diffi-culties in ascertaining how well municipalities are performing and whois responsible for any noteworthy problems that may arise. This seemsto provide local government legislators with greater scope for oppor-tunistic behaviour than their colleagues at higher levels of governmentand accordingly makes local government more prone to what bothDollery and Wallis (1997) and Weisbrod (1978) classify as legislativefailure. This may explain why in many real-world jurisdictions, state and

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federal governments sometimes retain statutory powers to override thedecisions of local governments or even suspend local governments andarrange new elections.

ASYMMETR IC INFORMATION AND COUNCILLOR C APTURE

Given the comparative lack of scrutiny afforded elected local governmentrepresentatives by apathetic municipal voters, relationships between thesecouncillors and senior professional managers in the local governmentbureaucracies take on even greater significance than comparable relation-ships between politicians and public servants at higher levels of govern-ment. Ronald Wintrobe (1997, p.430) has posed the central question inthis context by asking ‘how much influence does the bureaucracy haveover what (and how much) governments do?’ One way of understandingthe nature of these relationships is through agency theory.

If we conceive of the public sector in a representative democracy asbeing constituted by an interlocking series of principal-agent relationships,then the importance of agency failure becomes apparent. For example,Moe (1984, p.765) observes that ‘the whole of politics can be seen as achain of principal-agent relationships, from citizen to politician to bureau-cratic superior to bureaucratic subordinate and on down the hierarchy ofgovernment to the lowest-level bureaucrats who actually deliver servicesdirectly to citizens’. This view leads to an approach to public sector reformthat seeks to reduce the scope for agency failure in these relationships.

I contend that the agent/principal problems between elected repre-sentatives and professional bureaucrats in the local government milieuare likely to be much more acute than in their federal and state counter-parts. Various arguments can be advanced in support of this contention.For instance, outside large metropolitan local governments, electedmunicipal representatives typically hold part-time positions and areremunerated accordingly. In the majority of cases they are thus obligedto have alternative full-time employment not only to sustain themselveseconomically in the short run, but also as a form of longer-term insur-ance against the possible failure of re-election in the future. They arethus unable to devote their full attention to the duties of their electedoffice. One consequence is often an inability to master the complexitiesand minutiae of local government finances and service delivery. Thisleads to a strong reliance on the advice and information provided by pro-fessional mangers. Following the economic theory of bureaucracy, thesemanagers may be motivated to pursue objectives in conflict with thoseespoused by elected representatives. Moreover, in accordance with


agency theory and the lack of capacity for elected representatives tomonitor principal/agent relationships with managers adequately, man-agers are well placed to exploit the resultant agency failure. Put differ-ently, since the ‘hands-on’ nature of their jobs means managers arebound to be much better informed than councillors, and since managersare the chief policy advisers to councillors, it seems likely that by manip-ulating the asymmetry of information to their advantage, managers can‘capture’ councillors and thereby the policy outcomes they desire.Although analogous problems clearly exist at higher levels of govern-ment, because elected representatives in national and state governmentsserve in a full-time capacity, they can devote much more time and ener-gy to mastering the complexities of the bureaux they oversee and arethus not as badly disadvantaged by problems of asymmetrical informa-tion and attendant capture as their colleagues in local government.

A similar and related argument derives from the fact that electedmunicipal councillors seldom have access to policy advisers at all, nevermind advisers with a detailed knowledge of the workings of local gov-ernment. By contrast, it is commonplace in state and federal govern-ments for elected representatives to have constant access to professionaladvisers and researchers well versed in the intricacies of policy formula-tion and implementation who can assist them in evaluating and ‘filter-ing’ information from public service managers. Whilst the presence ofsuch policy advisers and researchers obviously cannot completely nulli-fy the problem of asymmetric behaviour in the interactions betweenpoliticians and public sector executives and thus altogether remove cap-ture, it surely goes some way towards overcoming these problems.

Agenda control represents an additional means by which well-informed bureaucrats hold a comparative advantage over their relative-ly ill-informed political masters and can thus out-manoeuvre them inagent/principal terms. In their ‘setter model’, Romer and Rosenthal(1978) have shown how bureaucrats can control the outcomes of votesby elected councillors (or actual citizens in referenda) by specifying thealternatives which are voted upon. More specifically, councillors may becalled to vote on a particular budget proposal. If a majority favour theproposal, then it is accepted. If a majority reject the proposal, thenexpenditure is set at a predetermined ‘reversionary level’. In essence,‘the higher the reversion level, the higher the budget the bureaucraticsetter is able to extract from voters’, (Wintrobe, 1997, p.438), and ifthe reversionary level of expenditure is set higher than the pre-voteexpenditure, then this also allows for budget growth.

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Finally, strategies of ‘selective behaviour’ (Breton and Wintrobe,1982), especially ‘selective efficiency’ (Wintrobe, 1997) can beembarked upon by bureaucrats using their advantage of asymmetricinformation. Wintrobe (1997, p.431) describes selective efficiency as ameans by which ‘…bureaucrats control their masters’ choices by beingefficient at the things they want to do, and inefficient at those they donot’. Thus when elected representatives oblige public managers toimplement policies against their will, these can be confounded by delib-erate inefficiency until they are withdrawn. Conversely, in areas wherebureaucrats wish to expand operations, they can ensure efficient deliv-ery and bring this to the attention of politicians. Given the greaterdegree of asymmetric information in municipal governance, it can beargued that selective efficiency is likely to prove a more potent weaponthan at higher levels of government.

I RON TR IANGLES

Whereas some of the earlier taxonomies of government failure I notedmade explicit reference to citizens attempting to divert scarce resourcesfrom governments to themselves, like Dollery and Wallis’ (1997) rent-seeking category, most of these typologies nevertheless at least implicit-ly recognised that individuals and interest groups seek to influence bothpolicy formulation and implementation in self-interested ways.

The analysis of interest groups in redistributing wealth and powerthrough the political process has been approached by economists from atleast three main theoretical directions. Firstly, and perhaps most impor-tantly, the theory of rent-seeking tries to explain the ways in which citizensas wealth maximisers seek to use government intervention to create eco-nomic rents for themselves. The resultant burgeoning literature has pro-vided fascinating insights into the interplay between state intervention andmaximising economic agents (Buchanan, Tollison and Tullock 1980).

A second theoretical perspective on the role of interest groups in thepolitical process derives from Mancur Olson’s (1965) pioneering workon distributional coalitions. Olson sought to provide a generalisedanalysis of ‘…the problem of collective choice, the prisoner’s dilemma,the free-rider problem and the conditions of common fate, dependingon the context (or discipline) in which it arises’ (Barry and Hardin1982, p.19) by invoking the economic paradigm of rational choice ingroup or collective behaviour.

Finally, endogenous policy theory, first developed by Magee, Brockand Young (1989), can also shed light on the manner in which interest


groups can manipulate the political process to secure their desired dis-tributional outcomes. In essence, this theoretical perspective investi-gates the nature of economic and social policy formulation and tries toexplain why welfare-reducing policy distortions exist since they are notrational from the point of view of society as a whole. Magee, Brock andYoung (1989) distinguish between the concepts of economic efficiencyand political efficiency. They argue that ‘economically efficient policiescreate greater gains than losses whereas inefficient policies do thereverse’ (Magee, Brock and Young, 1989, p.1). By contrast, politicallyefficient policies are those which increase the probability of election ofparties and candidates. Moreover, a trade-off generally exists betweeneconomic efficiency and political efficiency.

Although policy formulation and implementation at all levels of gov-ernment will be characterised by rent-seeking distributional coalitionsmaximising self interest in a process of endogenous policy development,it seems likely that powerful interest groups may be particularly success-ful in the local government sphere. I have argued earlier that municipalpoliticians generally without strong party affiliations are often elected onill-defined policy platforms by apathetic and ill-informed voters and theiractivities are typically not subject to the same degree of media and otherscrutiny as their colleagues at higher levels of government. Similarly, pro-fessional bureaucrats enjoy far greater discretion as a consequence of theacute asymmetry of information between them and their part-time polit-ical masters. Moreover, outside of the American political system, with itsstrong emphasis on congressional committees and other delegated pow-ers, and in contrast to Westminster-style parliamentary democracy, localgovernment relies much more on standing committees to oversee itsoperations. For instance, municipal councils usually have ‘parks and gar-dens’ committees to run its public open spaces programs, ‘roads andmaintenance’ committees to direct its public thoroughfare operations,and so forth. Interest groups can thus readily identify specific politicianswith powers over particular aspects of municipal activity and target theseindividuals accordingly. They can also form alliances with municipalmanagers in charge of the various programs and attempt to influence theadvice these bureaucrats give to committee members. In this way ‘irontriangles’ made up of elected committee councillors, professional man-agers and interest groups can arise which dominate policy making in spe-cific areas. Often these interest groups will be made up ofsub-contractors who undertake operations for municipalities, supplierswho provide goods and services to councils, property developers who

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build and renovate residential and other areas, and businesses that enjoypreferential zoning arrangements and licensing agreements. The tripar-tite composition of these confluent colluding associations — or ‘trian-gles’ — and the difficulty of penetrating into them — or their ‘iron’nature — mean that these iron triangles will tend not only to be domi-nant for considerable periods, but also stable through time.

Rent-seeking in this situation will aim at the formation and protec-tion of iron triangles and countervailing rent-seeking by individuals andgroups outside of triangles will consist of attempts to join existing tri-angles or replace extant triangles with new ones. Olson’s (1965) cate-gorisation of interest groups as either potentially successful(‘privileged’) or inherently unsuccessful (‘latent’) will determine theoutcome of rent-seeking activity. Resultant policy formulation andimplementation can be characterised as endogenous in the sense that itrepresents the interplay of the interests of the politicians, bureaucratsand interest groups who form the iron triangle in question.

Bailey (1999) argues that distributional coalitions are likely to have agreater deleterious effect on resource allocation in local government thanat higher levels of government in a federation. He contends that a highproportion of local tax payments are fixed by various rules, not least prop-erty taxes which depend on land value, and do not vary significantly withthe consumption of local government services. Under these circum-stances, distributional coalitions have an incentive to attempt to changethe level of service provision in their favour or to modify the distributionof service provision with a given and largely exogenously determinedfixed total municipal budget. Accordingly, the activities of interest groupswill focus heavily ‘…on the distribution of incremental expenditures andmuch attention is paid to annual budget changes which are small in rela-tion to the overall budget’ (Bailey, 1999, p.97). No distributional coali-tion will be willing to accept a fall in the services it receives because nocorresponding change in its tax liability could occur, given the structureof municipal finances. Since opposing interest groups may tend to neu-tralise each other’s influence, existing expenditure regimes would tend toremain fixed. This means inter alia that local governments experiencegreat difficulties in meeting ‘changed socioeconomic conditions’, withthe result that allocative inefficiencies would inevitably intensify.

Boyne (1998) believes that the degree of ‘fragmentation’ or decen-tralisation of local government might affect the demand for ‘spatially divis-ible’ public goods as opposed to ‘spatially indivisible’ public goods.Spatially divisible goods benefit particular localities rather than encompass-


ing neighbouring zones whereas spatially indivisible goods benefit muchgreater areas. Thus residents of a given jurisdiction will prefer relativelymore spatially divisible goods on grounds that the benefits of these goodswill fall exclusively on them and adjacent jurisdictions will not be able to‘free ride’ on the fruits of their rates and taxes. A similar argument can beadvanced with respect to the power and enduring nature of iron triangles.I would expect that the greater the degree of fragmentation, the more sig-nificant would be the impact of iron triangles on policy making. After all,small local governments will attract less voter interest, enjoy minimal over-sight by elected politicians, and draw little media attention in comparisonto larger municipal entities where the ‘stakes are higher’. Accordingly, irontriangles are probably easier to form in fragmented systems.

The possibility of corruption within iron triangles also appears tobe greater at the local government level than at higher tiers of gover-nance. For example, Rodden and Rose-Ackerman (1997) point outthat the ‘smallness’ and ‘intimacy’ of municipal jurisdictions makesthem especially susceptible to corruption. Similarly, after reviewing theevidence, Susan Rose-Ackerman (1999, p.149) observes that ‘the mostcorrupt and patronage-ridden governments seem to be at the locallevel in most countries, including developed countries such as theUnited States and Germany’.

F I SC AL I LLUS ION

In advanced modern economies governments undertake a bewilderingarray of expenditure and regulatory functions and finance these activi-ties through a myriad taxes and charges on their citizens. Measuring thesize and cost of government has thus proved both conceptually andempirically difficult even for professional economists (see, for example,Dollery and Singh, 1998), let alone participants in the political process,especially voters. One consequence of the size and complexity of contemporary government in industrialised societies resides in the phenomenon of fiscal illusion. In essence, the concept of fiscal illusionrevolves around the proposition that the actual costs and benefits ofgovernment may be consistently misconstrued by the citizenry of agiven fiscal jurisdiction. Five specific forms of fiscal illusion can be iden-tified (Dollery and Worthington, 1996), two of which are especiallyimportant in the context of local government.

Firstly, the ‘flypaper effect’, so-called since ‘money sticks where ithits’, refers to the hypothesised tendency for categorical lump-sumgrants from federal to state and local governments to increase public

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expenditure by more than an equivalent increase in income from othersources. This proposition contravenes the ‘equivalence theorem’, a cen-tral proposition of the traditional theory of inter-governmental grants(Oates, 1972), which holds that a lump-sum grant to a fiscal jurisdic-tion will stimulate the same increase in expenditure that would flowfrom an equivalent increase in the private incomes of people who com-prise the population of the jurisdiction. It would seem that voters mis-perceive grants as ‘gifts’ to their jurisdictions and overlook the fact thattheir tax liability rises at higher levels of government. Despite somereservations about the methodologies employed to investigate the real-world prevalence of the flypaper effect in local government, it appearsthat empirical evidence exists in support of the model, although thisconclusion should be qualified by noting that institutional structuresunderlying the grants process in any country (or the problem of ‘endo-geneity’) obviously play a major role in determining the strength of theflypaper effect (Worthington and Dollery, 1999).

Notwithstanding theoretical difficulties in explaining the flypapereffect (Bailey, 1999), it seems clear that the stimulatory effects of inter-governmental grants on local government expenditure might prove tobe a major source of government failure at this level of government.After all, around 35 per cent of American and 30 per cent of Australianlocal government revenues derive from grants from higher levels of gov-ernment (Worthington and Dollery, 1999, p.4/5), whereas in theUnited Kingdom the corresponding figure is almost 80 per cent (Bailey,1999, p.87). Gramlich (1977) has estimated that in the United States,lump sum grants from the federal government appeared to generate afourfold increase in public expenditure in comparison to an equivalentincrease in the income of local residents. Although the framework with-in which the intergovernmental grant process occurs differs in otheradvanced countries, and will obviously influence the expansionaryeffects of these grants accordingly, the resulting allocative inefficienciesare also likely to be substantial.

Secondly, ‘renter illusion’ has quintessential significance in the localgovernment milieu. This form of fiscal illusion holds that an increasein the proportion of property renters in a given municipal jurisdictionwill increase the level of public expenditures ceteris paribus. The pre-sumption is that since the primary revenue of local government derivesfrom property taxes, only those voters who own property and are thusdirectly levied will correctly estimate the tax-price of local publicgoods. Although we could expect that higher property taxes will be


passed on to renters through higher rents, the renters’ illusion hypoth-esis contends that a disjunction exists between a rental voter’s percep-tion of the level of municipal services and the value of rents paid.Accordingly, renters will vote for higher levels of local public goodexpenditure than property owners.

A considerable body of empirical evidence has been amassed on therenters’ illusion hypothesis and the weight of this evidence appears tosupport the hypothesis (see, for example, Dollery and Worthington,1996, Table 4). However, several scholars have argued that ‘renterrationality’ might better explain the ostensible propensity of renters tosupport higher levels of local expenditure. According to this view, in theshort-run property rentals are not affected by property taxes and soincreases in taxes will not be passed on to renters (Barr and Davis,1996). From the perspective of local government policymakers,whether or not renter rationality explains some or all of renter illusionseems less important than the putative fact that a greater proportion ofrenters in a jurisdiction will tend to bias expenditure upwards.

Renter illusion makes local government especially susceptible togovernment failure for the obvious reason that higher levels of govern-ment are much less reliant on property taxes as a source of revenue.Moreover, rate-capping, rent controls and other factors which influencethe nexus between rentals, property taxes and municipal income aretypically exogenously imposed on local jurisdictions by state and feder-al governments. This means that allocative inefficiencies stemming fromthis source cannot easily be remedied by municipal policies themselveswithout the assistance of higher tiers of government.

POL IT IC AL ENTREPRENEURSHIP

Continuing in the tradition of Anthony Downs (1957) and many oth-ers, Olson (1965) sought to provide a generalised analysis of ‘…theproblem of collective action, the prisoner’s dilemma, the free-rider prob-lem, and the conditions of common fate, depending on the context (ordiscipline) in which it arises’ (Barry and Hardin 1982, p.19) by invokingthe economic paradigm of rational choice in the context of group or col-lective behaviour. In its simplest form, Olson (1965) postulates the logicof collective action as an equation of cost (C), gross benefits to individ-ual i (Vi), and net benefits to individual i (Ai) from their contribution tothe collective effort of some group in the following form:

Ai = Vi–C

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If Ai > 0 for any i, then the group in question is termed ‘privileged’,and will in general succeed in collective action. Alternatively, if Ai < 0for all i, then the group is ‘latent’, and will fail in collective action unlessadditional individual incentives can be brought to bear. Firstly, selectiveincentives may exist which induce successful collective action as a by-product of private incentives. In these cases, groups or organisationssupplying collective goods simultaneously provide separate negative orpositive incentives to group members or intended group members. Andsecondly, political entrepreneurship may be present where some indi-vidual or subset of a group finds it in their larger self-interest to providecollective goods to groups.

Typically, politicians at the higher levels of government have workedtheir way through the party political ranks, as it were, to attain their levelof office. A potted survey of politicians who have recently held high officein Australia provides support for this proposition. For example, KimBeazley, Peter Costello, Tony Abbott, John Howard and Bob Hawke, tomention a few, all began their political careers in student politics.

The behaviour of local government politicians can be analysed fruit-fully using the concept of political entrepreneurship. Councils can beconceived of as breeding grounds for political entrepreneurs to not onlycapture the attention of political party officials at higher levels of gov-ernment, but also of prospective voters in federal and state seats.

The actions of political entrepreneurs in themselves cannot neces-sarily be seen as a cause of government failure. A political entrepreneur,by working toward the collective goals of a council, may induce the effi-cient delivery of public services. However, since ‘allocative inefficiencyarises from the excessive provision of public goods as politicians pursuestrategies designed to maximise their chances of re-election rather thanpolicies which would further the common good’ (Dollery and Wallis1997, p.37), we can hypothesise that if a municipal political entrepre-neur seeks to advance her political career at higher levels of governance,her actions regarding public expenditure are likely to be correlated withcapturing the attention of voters and party officials rather than theallocatively efficient provision of public goods.

It can be argued that the problem of political entrepreneurship is like-ly to be felt more acutely at the local government level for at least threereasons. Firstly, since local government is typically the lowest level of gov-ernment in a federation, with a large number of elected representatives,the proportion of political entrepreneurs is likely to be higher at this levelthan any other. Secondly, due to the high degree of voter apathy, and


comparative lack of interest by the media in local government, a politicianwill need to embark on grandiose and eye-catching projects to becomeknown by voters. Similarly, a local government political entrepreneur mayfind it expedient to deliver ‘change’ even if the current policy stance isefficient. Finally, since state and federal jurisdictions are typically larger inarea and population than local government wards, political entrepreneursmay need to provide public goods that have a benefit region much largerthan that of the local government they represent.

C O N C L U S I O N

I have presented a taxonomic view of government failure in local gov-ernment which draws strongly on the generic typologies which havebeen developed by theorists operating in the broad public choice tradi-tion. Moreover, I have sought to argue that cogent reasons exist whichsuggest that government failure in general, and agency failure in partic-ular, are likely to be more acute in municipal government than its coun-terparts at higher tiers in a federalism. This conclusion is in contrast toviews of both Bailey (1999) and Boyne (1999), who seem to believethat since inter-governmental competition is greater at the local gov-ernment level it may be less susceptible to government failure.

If local government failure is indeed more pronounced, then weshould inquire as to whether it can be differentiated in kind from gov-ernment failure at federal and state levels; that is, does it consist of a dif-ferent mix of allocative inefficiency, productive inefficiency anddistributional inequity. Without a detailed empirical examination of thisproblem, it is difficult to speculate with any degree of precision.However, it does seem likely that allocative inefficiencies may well bemore evident since the relatively small size of municipal budgets makestrade-offs between alternative bundles of local public goods more acute.

If local government is indeed more prone to government failurethan state and federal governments, then this also raises interestingquestions about the design of appropriate governance mechanisms formunicipalities. For example, the amalgamation of small local govern-ment structures into larger units could moderate the extent of localgovernment failure. Similarly, the case for competitive tendering and‘out-sourcing’ may be stronger at the municipal level of governmentthan its higher counterparts. Moreover, uniform national standards ofservice delivery could be imposed on local governments to oblige themto provide minimal levels of local public goods.

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PA R T E F U T U R E D I R E C T I O N S

This volume set out to examine some of the major contemporary issuesconfronting Australian municipalities at the start of the twenty-first cen-tury. Preceding chapters have considered various dimensions ofAustralian local government from several disciplinary perspectives, withindividual contributions examining a range of concerns and policydilemmas in some detail. Whereas these contributions offer specialistanalyses of particular areas, the collection as a whole also provides a use-ful review of the transformation of the local government sector in recentyears. This final chapter now attempts to draw together some of theseinsights and place them in the broader thematic context of future localgovernance in Australia.

The chapter itself is divided into two main parts. In the next sectionwe seek to assess the achievements of Australian local government overthe recent past, especially in the areas of management, democracy andfinance. By contrast, the final section concludes this volume by consid-ering future directions that might assist in overcoming some of theproblems raised. In particular, we discuss the potential significance ofdeveloping sound intergovernmental consultative bodies, encouragingthe growth of regional organisations, enhancing the efficiency andeffectiveness of local government service delivery by entrenching theprinciple of comparative advantage in all of its operations, and stimulat-ing more discourse and inquiry into local governance.

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F U T U R E D I R E C T I O N S F O R A U S T R A L I A N

L O C A L G O V E R N M E N T

Brian Dollery and Neil Marshall

T H E A C H I E V E M E N T S O F A U S T R A L I A N L O C A L G O V E R N M E N T

MANAGEMENT

One of the most conspicuous achievements of local government overthe past decade lies in the manner in which it has reformed its internalfunctions and processes. Councils have restructured their organisation-al frameworks to cater for the outsourcing of services, developed com-mercial capabilities to compete in the business arena, adopted anorientation towards outcomes as opposed to inputs, and introduced arange of corporate strategic practices. These activities, of course, are allfeatures of the New Public Management (NPM) that has substantiallyinfluenced the operation of public agencies around the world. InAustralia, the impact has been particularly comprehensive. So much so,in fact, that Caulfield (Chapter 2) suggests that Australian local gov-ernment has emerged as an international leader in the extent to whichit has adopted and implemented the new managerial style.

To a considerable degree, the NPM was thrust upon councils bystate legislation, and subsequently encouraged by both Commonwealthand state agencies. However, the exercise amounted to far more than atop-down imposition by higher levels of government. As Geoff Bakerobserves in Chapter 7, many local authorities were willing recipients ofthe new strategies and viewed them as critical tools with which to copewith rising community expectations and declining sources of revenue.Indeed, a number of councils across all states have used the precepts andtechniques of NPM to respond creatively to the particular needs of theircommunities. Indicative of this situation is the nature of the awardsmade annually by the National Office for Local Government for innov-ative approaches in such areas as information technology, entrepreneur-ship and economic development (NOLG 2001, Appendix J). This is byno means a surprising result; Australian municipalities have a long his-tory of being at the forefront of management in the public sector arena(Wettenhall 1988).

In essence, the changes adopted by many councils appear to havebeen well-targeted and effective. In Queensland, for example, commu-nity attitude tracking surveys taken over the course of the 1990s revealhigh levels of public satisfaction with local government’s activities.Significantly, respondents expressed greater confidence in the role ofcouncils as service provider than the other spheres of government(LGAQ 2002, p.23). There are undoubtedly large variations in the

2 3 2 • F U T U R E D I R E C T I O N S

effectiveness and efficiency of the performances of individual munici-palities, both within and between states, as Baker notes (Chapter 7).Nevertheless, it would seem that overall the sector has performed well.

While local authorities will doubtless continue to refine their inter-nal structures and seek to improve outcomes, such gains are likely to bemarginal in the foreseeable future. Further significant increases in effi-ciency will probably only eventuate when there is much improved coor-dination and alignment of activities between state agencies and councils.This will involve rethinking the nature of intergovernmental mecha-nisms. In particular, it will necessitate attention being given to the prin-ciple of subsidiarity — that is, each function of government should bedevolved (where possible) to the lowest level of government, wheresuch action best serves the interests of the community.

Another challenge facing local government will involve the continu-ing shift away from traditional hierarchical administrative structures thathave characterised councils in the past. Increasingly, as Joe Wallis indicates(Chapter 9), managers will have to adjust to operating environmentsbased on market competition and the interaction of policy networks.Change of this order will require the acquisition of fresh skills and exper-tise. How both the above issues might be addressed is taken up later.

DEMOCRACY

The reform spotlight has fallen so heavily on management in recent yearsthat the democratic dimension of local government has, to a considerableextent, been overshadowed. Some commentators would put the evenstronger view that a strident preoccupation with obtaining improved eco-nomic performance has had a detrimental affect on civic values. In thisvolume, Rosemary Kiss (Chapter 6) argues in part that state reform pro-grams — and particularly the impact of amalgamations — have substan-tially weakened the democratic legitimacy of municipalities.

The concerns raised by Kiss certainly emphasise the need for seriousand sustained debate about the functions of local government withinthe broader Australian polity. At one level this process should involve anexamination of the constitutional status of the sector, its roles andresponsibilities vis-à-vis the state, and the nature of its relationships withhigher spheres of government. In common with issues of service provi-sion, such questions need to be tackled in the context of a formal inter-governmental structure and supported by highly developed protocols.

At a broader level, wide-ranging dialogue surrounding the nature ofthe democratic mechanisms which underpin the function of local

F U T U R E D I R E C T I O N S F O R A U S T R A L I A N L O C A L G O V E R N M E N T • 2 3 3

authorities is surely also necessary. One of the salient features of thereform processes across all the states in the 1990s was the absence ofserious discussion about the theoretical principles on which local gov-ernment should be based. The whole question of representative andparticipatory democracy, and the linkage between the two concepts,needs to be properly explored. Dynamic communities require sophisti-cated political structures that involve elements of both representativeand participatory democracy. The appropriate mix of measures neces-sary to achieve the constructive involvement of constituents will varyboth between localities and between states.

The question of governance, however, needs to move beyond tradi-tional notions of representation and participation to embrace consider-ation of a wider range of issues. These will include corporategovernance perspectives (which Marshall examines in Chapter 8) andmatters that pertain to local government failure, such as ‘voter apathy’and ‘iron triangles’ (discussed by Dollery in Chapter 11). Equallyimportant is an understanding of the wider fragmented and fluid envi-ronment in which municipalities now operate. Councils share theirregional space and responsibilities with a range of autonomous bodies,whose actions, either directly or indirectly, have a significant bearing onthe cultural, economic, social life of the community. Such bodies com-prise boards and committees appointed by state authorities, state andCommonwealth government departments, adjoining councils, as well asregional organisations. The ability of elected members and officials toachieve strategic goals will depend upon their capacity to interact, andnegotiate successfully, with these agencies. Such activity further rein-forces Wallis’ argument in his chapter: it will be necessary for partici-pants to build sustainable policy networks across diverse interests inorder to secure appropriate policy outcomes. The final section of thischapter examines ways in which dialogue of this kind might be fostered.

LOC AL GOVERNMENT ECONOMICS

Considerable progress has also occurred over the past decade in eco-nomics of local government. In common with higher tiers of govern-ment in the Australian federation, public sector reform has drasticallychanged the way in which local government approaches its core func-tions. Moreover, microeconomic reform, and especially NationalCompetition Policy, with its key ingredients of competitive neutralityand deregulation, has transformed the operation of the Australian economy. Local governments have thus had to adjust not only to a dif-


ferent internal regime, but also to new external realities. It is thereforenot at all surprising that elected representatives and council managersalike have experienced severe difficulties coming to terms with anentirely new environment. Despite these difficulties, much has beenachieved.

In essence, the institutional structure and managerial practices ofAustralian local government changed almost beyond recognition. As weargued earlier, under the influence of NPM councils have become muchless hidebound and bureaucratic and much more responsive to changesin their outside environment. Local government managers now havemuch greater latitude to act autonomously in terms of the NPM doc-trine of ‘letting managers manage’, but also simultaneously face muchmore accountability with the establishment of separate cost centres,which link administrative responsibility with resource expenditure.Employment patterns within the municipal sector appear to havechanged to accommodate these new developments. Executive positionsare now widely advertised to attract ‘new blood’, and executive recruit-ment is often aimed at hiring individuals from outside of the organisa-tion in order to stimulate fresh approaches to the problems confrontinglocal government. Managerial remuneration has risen proportionatelyover the past decade, occasionally to the chagrin of constituents.Commensurate with the greater challenges facing councils, managersnow possess greater institutional freedom to pursue alternative solutions.

Substantial change in the external economic environment has alsofostered an institutional revolution in Australian local government.Microeconomic reform has resulted in a much more flexible and dereg-ulated market economy in Australia, with significant repercussions forthe entire public sector, including local government. In essence, theprinciple of competition, with its purported benefits of enhanced eco-nomic efficiency, has been brought to bear on individual councils.Compulsory competitive tendering and outsourcing have become stan-dard instruments in the policy armouries of local governments in theirquest for greater efficiency. With the contracting out of service produc-tion and delivery now a viable possibility for municipal managers, thenature of Australian local government is shifting from service produc-tion and provision to service provision per se. The old nexus betweenservice provision and service production has been severed. Councils arenow charged with providing services, in the sense of paying for theirproduction and delivery, and then arranging the best possible means ofactually producing these services. Production may occur entirely


through outsourcing to the most economical contractors, remain anintegral part of a council’s activities through ‘in-house’ manufacture, orbe divided through some kind of public-private partnership. Emphasisis on providing ‘best value’ to ratepayers on a case-by-case basis. Theefficiency-inducing impact of this change can hardly be over estimated.Instead of the old doctrinaire insistence on council provision and pro-duction of municipal services, with all of its notorious waste and ineffi-ciency, the introduction of actual and potential competition for theright to produce and deliver services means that not only those activi-ties subjected to competitive tender become subject to market forces,but also goods and services still produced in-house will be affected bythe possibility of outsourcing. Thus even people and capital resourcesstill hired directly by councils themselves to produce and deliver servicesare obliged to become more efficient under the threat of outsourcing.

The introduction of the competitive principle to municipal activitieshas necessitated profound institutional changes in the operations ofAustralian local government. The relevant Commonwealth and stategovernment empowering legislation had to be thoroughly digested andapplied in practice — no mean feat in itself. Tender and other proce-dures had to be developed and perfected to meet the new challenges.Managers had to streamline existing council operations to ensure thatthey could rise to potential competition by contractors from the privatesector. This meant inter alia extensive training for employees and fre-quent restructuring of service departments. At the same time, the glob-al revolution in information technology had to be accommodated andincorporated into day-to-day operations. It is to the great credit ofthose people in Australian local government that these sea changes werenavigated with great skill on the whole.

One of the most important changes that have taken place in theinstitutional milieu of Australian local government resides in the natureof financial reporting. Christine Ryan (Chapter 4) outlines the substan-tial changes that have accompanied the introduction of AAS27Financial Reporting by Governments that now forms the framework forall public agency reporting in Australia, including local government.This methodology obliged municipalities to move from cash-basedreporting to accrual-based reporting. The rationale for this changederived from the need to provide financial information in a form moreaccessible to the general public and to bring accounting practice moreinto line with that employed in the private sector. Whilst the complexi-ties of the new reporting framework appear to have been admirably


mastered by many municipalities, Ryan nevertheless argues that twomain conceptual problems remain unresolved. In the first instance, it isnot at all clear that AAS27 is entirely suitable for the valuation of assetsand the associated problem of asset depreciation in the public sector.And secondly, the question of revenue recognition is problematic. Ryancontends that, despite the progress that has been achieved in councilfinancial reporting, these areas need to be revisited.

In addition to the revolutionary transformation wrought by publicsector reform, NPM and microeconomic reform, Australian local gov-ernments had to face at least three further sources of change. AndrewJohnson (Chapter 3) provides an excellent analysis of the triad of pres-sures brought to bear on councils by severe constraints on revenue rais-ing, unfunded mandates from higher levels of government, and rapidlyrising expectations from constituents. Johnson shows how the currentfinancial crisis confronting Australian local government derives in partfrom the inability of municipalities to raise sufficient funds to adequate-ly discharge their duties, especially in the area of infrastructure develop-ment and maintenance. Rate capping by state authorities, insufficientlyindexed grants from state and Commonwealth governments, and amarked reluctance by the public to pay ‘realistic fees and charges’ havemeant that the growth in local government income has been rapidlyoutstripped by the demands on its resources. This problem has beenintensified over the past decade by the inexorable downward shift ofresponsibilities from higher tiers of government, which local govern-ment has been constitutionally powerless to resist. Moreover, not onlyhave state governments, in particular, placed the burden of additionalfunctions on the unwilling shoulders of councils, in many cases theseresponsibilities have been unaccompanied by additional resources, or atleast insufficient resources. The need to augment and maintain a costlyand aging physical infrastructure has further intensified upward costpressures. Compounding these cost and revenue pressures has been agrowing ‘expectations gap’ derived from changing public perspectiveson the appropriate role of local government. Johnson argues persua-sively that people are no longer satisfied by the traditional ‘services toproperty’ role of Australian local government and demand instead anew and more resource intensive ‘services to people’ orientation. A sub-stantial and rapidly increasing divergence between the abilities of localgovernments and the desires of their constituent groups has resulted.

One method of tackling the ostensibly intractable problem of inex-orably rising costs and insufficient revenue resides in enhancing the


efficiency of Australian local government. Andrew Worthington(Chapter 10) has demonstrated that tremendous progress has been madetowards measuring efficiency in local government and establishingappropriate benchmarks against which to evaluate the operations of indi-vidual councils. We have seen that a number of reforms have sought toachieve the goal of greater economic efficiency. For instance, the man-agerial revolution in local governance, with its attendant internal changesto municipal operations, has been instigated in order to make councilsmore cost effective. Similarly, the introduction of the competitive princi-ple also represents an attempt to boost the efficiency of municipalresource use by allowing managers to use the cheapest available organi-sational solution to service production and delivery. A third policyoption has sought to improve municipal efficiency by enlarging individ-ual councils through amalgamation. This policy is based on (the largelyempirically unsubstantiated) proposition that substantial economies ofscale and scope derive from municipal size. Thus councils with largerpopulations are deemed to be able to produce and deliver services atlower costs than their smaller counterparts. Although we will examinethe question of amalgamations, as well as policy alternatives in the formof ‘virtual councils’ and resource sharing, later in this chapter, for thepresent we simply wish to emphasise the far-reaching nature of structur-al reform in Australian local government over the past decade. As PaulMay has indicated (Chapter 5), amalgamation has not been applied uni-formly across all state and territory jurisdictions in Australia. Indeed, acontinuum exists from the drastic ‘forced’ amalgamations undertaken inVictoria at the one extreme, to the ‘voluntary’ and concomitantlyleisurely pace of restructuring in New South Wales at the other extreme.Nevertheless, considered as a whole, amalgamation has served as one ofthe major sources of change in Australian local government and thusserves to illustrate further the massive transformation of the sector overthe past decade. The fact the affected municipalities have overcomemany of the hurdles involved in amalgamation again underlines how wellthe sector has coped with rapid change.

F U T U R E D I R E C T I O N S

STATE /LOC AL PARTNERSH IP AGREEMENTS

We have sought to stress the importance of developing suitable inter-governmental mechanisms if some of the issues that have been identi-fied are to be successfully addressed. The benefits to be gained from


encouraging such activity have not been lost on state governments:indeed, over the past two or three years, they appear to have adopted afar more inclusive approach to the local government sector. All statesseem to have exhibited an increasing willingness to collaborate withmunicipal leaders and have begun to construct more extensive consul-tative arrangements to facilitate interaction. However, the nature of thisinvolvement varies significantly across jurisdictions.

Tasmania undoubtedly leads the field in terms of its ‘whole-of-gov-ernment’ approach to engaging its municipalities. In 1999, the StateCabinet approved the development of a system of PartnershipAgreements with the local government sector. These agreements areintended to improve service delivery, and achieve specified social, eco-nomic and environmental objectives. The Agreements work at threelevels. The first involves senior state agency managers negotiating withindividual councils. Both parties attempt to identify priority issues ofmutual concern, and find suitable solutions. Projects undertaken so farrelate to tourism, information technology, sport and recreation, health,and heritage. Each individual Agreement is personally signed by thePremier. A similar process takes place at the regional level and compris-es groupings of councils. Finally, at the State level, the Premier’s LocalGovernment Council has been set up to consider state-wide matters,such as waste management and planning coordination. The Councilconsists of representatives of the Tasmanian Local GovernmentAssociation and senior officials of state agencies (Scott 2002).

South Australia has gone down a similar path to Tasmania, but issomewhat less advanced. The State’s decision to move in this directionfollowed a review in the late 1990s that examined the scope of interac-tion between state agencies and local governments. When it transpiredthat this activity was quite extensive, State Cabinet decided to launch‘The State/Local Government Partnerships Program’ in 2002. The newventure was to be shaped and implemented by an appointed forum.Chaired by the Minister of Local Government, the forum comprises rep-resentatives from the South Australian Local Government Association,metropolitan and rural members of parliament, chief executive officers(CEOs) from state agencies, and senior managers from councils. ThePartnership Program is intended to be a functional reform processdirected at improving cooperation between state and local governmentsand addressing strategic issues of importance. Recently, the program hasbegun to operate on a regional basis, though this is not yet as clearlyarticulated as the Tasmanian approach (Proctor 2002, pp.7–9).


Victoria has similarly embarked upon a strategy that contains someof the elements of the South Australian and Tasmanian approaches. Inthe wake of the 1999 election, the State government sought to regen-erate a collaborative working relationship with the councils. An annualRegional and Rural Mayors Summit, chaired jointly by the Minister forState and Regional Development, and the Minister for LocalGovernment, has been formed. The Local Government ConsultativeCouncil, which meets four times each year, has also been convened bythe Minister for Local Government. Municipalities are represented inregional groupings and meet with relevant state agency officials on par-ticular issues. Moreover, a bi-monthly forum consisting of council chiefexecutives and officers from the Department of Local Government isheld to consider matters relating to management (Digby 2002, p.4).However, the Victorian initiative is clearly still in its early stages ofdevelopment.

Current initiatives in Western Australia are even more recent. A yearafter the election of the Gallop Government in 2001, Cabinet outlinedmeasures to introduce a State-local partnership arrangement based on aset of agreed principles. The model involves the Western AustralianLocal Government Association working with State authorities on poli-cy formulation and decision-making in areas where both spheres of gov-ernment are major stakeholders. A critical feature of the new frameworkis the establishment of a State and Local Government Council to over-see the partnership process. The Council consists of the Premier,Treasurer, key ministers, and local government representatives. Initialdeliberations will focus upon building consultative protocols, and devel-oping a number of shared policy projects (Burges 2002, p.20). Itremains to be seen how the outcomes of these intentions will actuallyevolve over the next few years

In contrast to the broad approach of these states, Queensland andNew South Wales have chosen agency or issue-centred strategies.Queensland’s Department of Local Government uses the IntegratedPlanning Act 1999 to coordinate state and local planning. The Act pro-vides for the establishment of Regional Planning Advisory Committeesthat encompass two or more local government jurisdictions. TheseCommittees are not general planning forums. Instead they have been cre-ated to formulate policy relating to specific economic, social or environ-mental concerns. The Advisory Committees can make recommendations,but these can only be implemented through the voluntary co-operationof constituent councils. The Committees are not incorporated and have


no authority to manage funds. Their function is essentially that of plan-ning and co-ordination. Seven such bodies have been established inQueensland since 1999 (Meppem et al. 2002, Appendix B).

The Department of Urban Affairs and Planning in New SouthWales has been given responsibilities similar to Queensland’sDepartment of Local Government; it employs the provisions of theEnvironmental Protection and Assessment Act to integrate the State’splanning procedures. Plan First (2001) brings together all the State’senvironmental and related planning activities under one heading.Emulating the Tasmanian approach, Plan First operates at three broadlevels. At the ground level, after due consultation with residents, indi-vidual councils prepare ‘whole of community’ land use strategies, whichinclude economic and social perspectives. In regional terms, a forumconsisting of community and business representatives, state agenciesand members of parliament, generates cross-regional proposals. Finally,at the State level, the Department of Regional Affairs and Planningmonitors and coordinates the relevant planning activities of all stateagencies. The Minister presides over the entire process and may amendlocal and regional intentions to ensure they conform to State require-ments. Plan First, however, differs from Queensland in so far as thelocal government sector is treated as only one participant among many.

Clearly, of all the state strategies outlined above, the Tasmanian initiative would seem to offer the most potentially effective inter-governmental framework. Partnership Agreements embrace a ‘whole-of–government’ approach that provides for structured and equitableinteraction between players. When supported by protocols and the impri-matur of the most senior echelons of the state government, agreementswill possess a high degree of credibility. They also provide an appropriateforum in which to consider the issues raised in the previous sections: theneed to reconsider the financial situation of local authorities, especially theunfunded mandate (this is taken up in more detail later in the chapter),and the respective roles and responsibilities of the two levels of govern-ment. There is obvious scope here, too, to apply the subsidiarity princi-ple. Finally, a system-wide perspective such as this facilitates an honestappraisal of the extent of the disparities exiting between metropolitan andregional areas, and the best means of redressing them.

However, significant obstacles stand in the way of developing inclu-sive partnership arrangements. Not least of these is the mutual suspicionthat has existed between state and local governments in some states formany years, even decades. Recently, the National President of the Local


Government Managers Association went so far as to observe that ‘wehave seen some state governments regard local government with dis-dain’ (Oxley 2002, p.3). While this comment was directed largely at theVictorian reforms of the 1990s, it also reflects the frustration felt insome quarters at the sector’s long-standing subservience to state gov-ernments. Even in South Australia, where relations between local gov-ernments and state agencies have been relatively benign, breaking downadverse perceptions has required a determined effort. For instance,Proctor (2002, p.11) has noted that ‘while we can make a difference inthe way individual public servants in state and local government relateto each other, it is a very slow process indeed achieving institutionalchange’. The creation of partnership agreements will clearly takepatience and time and will need to be shaped by the particular politicalculture of the state involved.

A second major obstacle confronting the emergence of comprehen-sive partnership agreements is the logistical difficulties involved indetermining the shape of structural arrangements. How do officialsalign and co-ordinate dozens of state programs with 68 local govern-ments, in the case of South Australia, or 156 in Queensland? No doubtone of the factors underlying the success of Tasmania’s approach is therelatively small size of the state, and the limited number of state agen-cies and councils (29 in all) involved. In the more populous jurisdictionsthat possess administrative and infrastructure frameworks of substantial-ly greater complexity, the difficulties are significant.

We suggest that one long-term solution to this problem may be toencourage the growth of Regional Organisations of Councils (ROCs).The benefits that these entities offer are taken up in the following section.

REGIONAL ORGANISAT IONS OF COUNCILS (ROCS)

ROCs are voluntary groupings of neighbouring councils. Though notwell known in the broader public arena, they have been an establishedfeature of the Australian local government landscape for many years. Thefirst ROC was established in Tasmania in 1922. Others were formed inall states over the course of the following decades. There was a suddenincrease in the numbers established during the early to mid-1990s as aresult of federal government support for regional development. By1995, Northwood (1995, p.1) estimated that there were about 50 suchbodies in Australia covering almost 45 per cent of councils, and around75 per cent of the population. This number fell during the 1990s as aresult of the amalgamation programs implemented by South Australia,


Tasmania and Victoria. In 2001, it is estimated that there were some 30to 40 ROCs in operation (Marshall and Witherby 2002, p.1).

The majority of ROCs consist of between five and fifteen councils(with the largest having 18). Size and population varies enormously; theWestern Sydney Regional Organisation of Councils (WSROC), forexample, is formed from 11 councils, covers 5851 square kilometres,and contains 1 500 000 residents. By contrast, the Murray RegionalOrganisation of Councils has only 10 members, but is spread over 63 257 square kilometres (some 7.8 per cent of New South Wales) andcomprises just 45 532 constituents. The average ROC is financed by aset fee from member councils, supplemented by a pro rata contributionbased on population or rates income. Participating councils appoint twoor three individuals to sit on the ROC board. These representativesalmost always include the mayor, along with another councillor and/orthe CEO. Most ROCs are supported by administrative structures andspecialist committees.

Joining a ROC offers a number of benefits for participating coun-cils. Firstly, meetings provide an opportunity to exchange ideas andconsider issues of common interest. Such interaction also allows (often)disparate entities to foster a sense of cohesion and regional identity.Secondly, forums of this nature encourage the development of commonpolicy on issues such as housing, soil and water management andrecords management. Because ROCs have access to expertise, data andexperience that is drawn from across a range of councils, outcomes aremore likely to be well informed. Thirdly, ROCs can assist in the co-ordination and rationalisation of activities across jurisdictions.Outcomes may range from a quite modest brochure for walking trails,for instance, to a set of complex environmental planning documents.

Fourthly, ROCs facilitate resource sharing and joint purchasingarrangements. Such practices allow members to develop superior tech-nical specifications addressed to their particular needs, and to providefor economies of scale in the use of expensive equipment. Smallerregional groupings benefit in this regard at least as much as the largerurban ROCs. Over a three and half year period in the late 1990s, forexample, the Riverina Eastern Regional Organisation of Councils(2001, p.6) delivered savings of over $2.5 million to its 13 membersthrough joint purchasing.

Finally, and perhaps most importantly, ROCs function as regionallobbyists. When a group of councils can provide a united front on a par-ticular issue, their views will usually carry much greater weight with the


relevant federal and state authorities. Submissions are also more likely tobe thoroughly researched and better argued. There is little doubt thatsome ROCs have become highly refined and knowledgeable in the tech-niques and strategies they employ. It is clear that many have achieved sig-nificant successes with their lobbying activities. Probably the mostimpressive outcome in this regard was the Western Sydney RegionalOrganisation of Council’s success in persuading the New South Walesgovernment to appoint a separate Minister for Western Sydney.

Certainly, there have been some very successful ROCs in Australiain recent years that have benefited from most or even all of these fac-tors. Moreover, successes have not been confined only to the metro-politan areas. Several groupings of councils in regional and remote areashave formed highly effective organisations. It remains true, nonetheless,that the largest and most influential ROCs are situated around the capital cities.

Not all ROCs succeed. Some are uninspired groupings that achieveonly just enough to keep the entity intact. Others are disbanded afteronly a short period. A few experience a period of considerable achieve-ment and then cease to exist. It remains uncertain, however, just whatcombination of characteristics is necessary to create a high-performingROC. There is no clear mix of such variables as rates income, geo-graphical size, population density, cultural homogeneity, length of timesince establishment, or industry type, which might explain why someROCs are more successful than others. Rather, it seems that the criticalattributes which contribute to a successful ROC are the intangible fac-tors of commitment, teamwork, regional vision, trust, openness, com-munication, leadership, and a willingness to cooperate.

These last features, of course, correspond quite closely with Wallis’notion of ‘network’ forms of governance where players interact in termsof shared values and operational understandings. Indeed, from this per-spective, ROCs offer a framework for providing a stable, long-termstructure for regional governance in Australia. ROCs evolve from thebottom-up, creating their own institutional arrangements and infra-structure requirements as they grow. This approach ensures that eachgrouping is attuned and adaptive to its particular regional needs.Because they emerge from the grass roots, ROCs are likely to enjoy alegitimacy and credibility in the eyes of constituents that an imposedlevel of government would take many years to achieve.

In the context of this chapter we suggest that such a system ofregional governance is a desirable development in Australia. ROCs offer


many of the benefits of larger, formal administrative structures whilesimultaneously preserving the autonomy and sense of community val-ued by individual local authorities. Moreover, the ROC conceptremains equally applicable in an amalgamated local government envi-ronment: even the largest merged municipality is unlikely to cover awhole region. The post-amalgamation experience in Tasmania andSouth Australia indicates that the need for groupings of councils remainas strong as ever. Indeed, in both states new configurations of ROCshave begun to emerge.

Possibly the most important characteristic of ROCs resides in thefact that they offer state governments a potentially very efficient andeffective means of developing partnership arrangements. A ROCenables just a single point of contact for state agencies in areas such ashealth, housing and welfare. An arrangement of this sort facilitates abroad appreciation of regional requirements whilst at the same timecatering for the needs of smaller areas.

LOC AL GOVERNMENT EFF IC IENCY

As we argued earlier, much has been achieved in making Australian localgovernment more efficient and effective. Managerial practice hasimproved sharply, institutional structures have been radically redesignedto promote efficiency-enhancing competition in the form of outsourcingand public-private partnerships, financial reporting has been strength-ened, massive structural change has been absorbed, and in general coun-cils are now much more client-focussed than in the past. Nevertheless,substantial problems remain to be satisfactorily resolved in future.

In the first place, although Andrew Worthington cogently demon-strated that most of the technical obstacles to performance measure-ment have been overcome, fully transparent benchmarking has yet tomaterialise. This is in large part due to the fact that in many state juris-dictions, local governments still produce unaudited data on their owneconomic performance. Moreover, in some instances this data is tardyin forthcoming. Thus, despite significant econometric advances in thestatistical measurement of economic efficiency, little reliance can oftenbe placed on the results of benchmarking exercises because of flawed orincomplete data.

In an era of public sector transparency, it is simply unacceptable thatinefficient councils are permitted to disguise the fact that they lagbehind their counterparts in service delivery. As Andrew Johnson hasargued, local governments can hardly call for greater financial sacrifices


from ratepayers and larger funding contributions from higher levels ofgovernment in the absence of reliable benchmarking data on their ownperformance. Moreover, it seems grossly inequitable that a ‘tail’ ofpoorly performing councils can wag the body of the ‘dog’ of munici-palities genuinely attempting to lift their game. The long-run cumula-tive effect of a system of ‘self reporting’ that enables inept councils toconceal their inefficiencies will surely be a ‘race to the bottom’.

There is thus an urgent need for state-based local government asso-ciations, such as the NSW Local Government and Shires Association, toensure that accurate and timely data is employed in annual benchmark-ing exercises. This will have at least three beneficial effects. Firstly, pub-lic confidence in municipal performance appraisal will grow and with itthe esteem in which local government is held. Secondly, state andCommonwealth governments will be reassured that the grant fundsthey transfer to local governments are diligently and efficiently expend-ed. And finally, reliable benchmarking will enable individual councils tocompare their own performance with like municipalities and adjust theirbehaviour accordingly.

Various institutional possibilities for gathering accurate current dataexist. Perhaps the ‘first-best’ option would be for local government rep-resentative bodies in each state and territory to lobby their provinciallegislatures allow state departments of local government to collect andaudit performance information under the force of law. Individual coun-cils that fail to produce reliable information by an assigned date couldbe punished by a reduction in the level of their grants. Should thisoption be resisted by state authorities on cost or other grounds, thenlocal government associations could simply collect the data themselvesand submit it to external audit by public accounting companies.Whatever data collection and oversight procedure is employed, it is crit-ical that it be transparent and trustworthy.

Local government restructuring remains another concern.Although the process of local government consolidation is complete forall intents and purposes in some state jurisdictions, most notablyVictoria and Tasmania, in other large states, like Western Australia andNew South Wales, the prospects for restructuring have yet to beexplored in detail. Proponents of municipal amalgamation have insistedthat larger local governments can achieve significant economies of scaleand scope with substantial cost savings. By contrast, opponents of amal-gamation have typically disputed the existence of considerable scale andscope economies and pointed to practical problems faced by rural and


regional councils situated vast distances from their neighbouringmunicipalities. Available Australian empirical evidence on economies ofscale and scope is mixed and extant international data moot (see, forexample, Byrnes and Dollery, 2002).

In his chapter, Paul May argues that concerns over any adverseimpact the amalgamation of small councils into larger administrativeunits on democratic representation can be met with the creation of ‘vir-tual councils’. According to this view, existing small councils can main-tain their current representational structure whilst at the same timepooling and sharing resources with adjacent municipalities by formingvirtual councils. Under this kind of ‘have your cake and eat it’ arrange-ment, the purported advantages of low ratios between voters and elect-ed representatives can be conserved while simultaneously enjoying thealleged benefits of any scale and scope economies that may arise.Whereas utopian schemes of this ilk appear at first sight to resolve manyof the potential trade-offs between democratic participation and eco-nomic efficiency, as May argues, the crux of the matter surely lies notonly in the division of any pecuniary benefits, but also the allocation ofcosts. It is hard to see how these problems will be resolved in the frac-tious ‘real world’ of Australian local government.

A much more promising (and older) alternative to amalgamatedlarge councils resides in resource sharing between adjacent small coun-cils. Dollery (1997) has argued that the resource-sharing model enjoysboth theoretical and empirical support. For instance, councils are statu-torily obliged to fulfil a number of different functions, many of whichwill have different geographic zones or (‘benefit regions’) over whichtheir benefits are spread. Thus street lighting typically benefits people inthe immediate vicinity whereas large public parks may attract peoplefrom afar. Spillovers (or externalities) of the latter kind lend themselvesto cost-sharing arrangements between jurisdictions whose residents arelikely to benefit. Similarly, in cases where economies of scale can bedemonstrated, such as domestic waste tip sites, adjacent councils canbenefit by sharing these resources and bearing the associated costs on aper capita (or equivalent) basis. If resource sharing is undertaken on acase-by-case basis, then the political pitfalls of virtual councils can beavoided since no formal and binding long-term agreement has beenmade to agglomerate all council functions. Trial and error in particularand promising service areas can be employed to test for the existence ofscale economies, and if they do not generate significant cost savingsthen the resource-sharing ‘experiment’ can be abandoned.


The essential point we seek to make in regard to local governmentrestructuring in Australia is that this ‘unfinished’ process requires agood deal more attention in future. Both the theoretical and empiricalarguments that ‘bigger is better’ are not presently convincing.Moreover, structural alternatives to amalgamation are available, such asresource sharing and virtual local government. Additional discourse andinquiry are urgently required in this area.

GENERAT ING D ISCOURSE AND INQUIRY

We conclude this chapter, and the volume, by addressing one of themost problematic issues facing local government today: the low profileof the sector in the public consciousness. Unlike its state and federalcounterparts there is very little informed dialogue about the functions,structures and purposes of Australian local government. The last — andonly — time such dialogue took place with a national focus occurredduring the early 1980s, following the establishment of the AdvisoryCouncil for Inter-Government Relations (ACIR) by (then) PrimeMinister Fraser. The Council subsequently produced 13 discussionpapers and three reports on local government. Balmer (1989, p.7)observed that the Council’s great achievement lay in the following:

[T]he debate it generated in local government circles. Each dis-cussion paper was circulated in draft form and comment on itscontents was encouraged. As the reports themselves were devel-oped, they too were widely circulated and seminars held to dis-cuss their tentative proposals, as well as written commentobtained from government departments and other agencies.This process resulted in public servants from all three spheres ofgovernment and the elected members of local governmentdeveloping a deeper understanding of its place within the feder-al system and its potential for a more widespread contributionto public life’.

Undoubtedly the Council’s efforts did a great deal to lift the publicimage of local government across Australia and helped persuade premiersto formally recognise the sector in state constitutions. They also encour-aged federal authorities to put national constitutional recognition oflocal government to referendum in 1988 (which then failed to carry).

Given the changed political climate, it is unlikely that another bodylike the ACIR will emerge in the near future. Rather, the role of thestate and national local government associations probably offers the


most likely possibility of promoting discourse. During the late 1980sand early 1990s the Australian Local Government Association (ALGA)set about revitalising the sector as a whole and, in particular, building acohesive and co-ordinated stance on critical issues. The ALGA itselfemerged as a forceful and influential lobby with a sophisticated andwell-researched approach to policy development. The result was sub-stantial success for the Association in persuading the federal govern-ment to support desired courses of action. During the late 1990s theALGA has been redoubling its efforts to promote the importance oflocal authorities in national affairs. It has expanded its influence in crit-ical forums and is now represented on 70 federal councils and commit-tees. Such strategies have undoubtedly served to lift the profile of localauthorities in professional circles around Australia.

Many of the state associations have also worked hard to project localgovernment more firmly into the community’s consciousness. Thoughthese endeavours have certainly born much fruit, the raising of a nation-al awareness of the achievements of councils continues to be hamperedby the narrow territorial perspectives of some state associations. At thegrass roots level, councillors and managers receive little informationabout what is taking place in other states. The partnership initiativesdeveloped by Tasmania and South Australia, for example, though famil-iar to senior administrators in adjoining states, took a long time to fil-ter down through the system. One of the benefits of having a federalstructure is that it allows various jurisdictions to experiment with dif-ferent approaches to policy issues. The outcomes of these experimentsneed to be widely disseminated for the benefit of the local governmentsector as a whole.

Finally, the universities are well positioned to play a critical role inbuilding local government’s public profile. They can contribute byoffering courses that both recognise the distinctiveness of the sector,and provide appropriate training for municipal practitioners. As thesophistication and complexity of council activity increases, career-ori-ented managers are discovering — in line with their counterparts inother spheres of government — that they need to supplement theirundergraduate degree with a post-graduate qualification. This has usu-ally involved undertaking a Masters of Business Administration, orMasters of Public Policy/Public Management.

The generic management skills imparted by qualifications such asthese undoubtedly served local government well during the 1990s. It isdoubtful, though, that they can continue to meet the evolving needs of


the sector into the 2000s. Studies in business management are typicallyoriented towards the private sector, while public policy and publicadministration courses cater largely for more conventional governmentagencies. The specific requirements of local authorities, however, differsubstantively not only from the private sector, but also increasingly fromthose of state and federal bodies. Characteristics which distinguish theoperation of councils from other spheres of government have beenalluded to in almost all the previous chapters contained in this volume.Two further examples are worth mentioning here. First, where there isa separation of roles between the legislature, executive and judiciary instate and federal of government, these roles are fused at the municipallevel. This situation significantly alters the dynamics of institutionalactivity and the manner in which managers interact with elected mem-bers. Second, the strategic dimension of local government activity isespecially difficult because managers have to adopt a ‘whole of commu-nity’ perspective. This involves attempting to embrace the competingdemands of a spectrum of citizen interests, as well as delivering a diverserange of services. The complexity of this exercise in large urban munic-ipalities probably exceeds that undertaken by any single state or federalgovernment department. Practitioners need to understand and accom-modate the nature of such activities if the local government sector is tofunction effectively and reach its full potential in the future.

With local government growing in scope and maturity, and assum-ing an increasingly salient position as an economic driver in the nation-al polity, it is time to develop university degrees designed specifically forneeds of the sector. These courses would be constructed in close col-laboration with industry bodies like the Local Government ManagersAssociation, and offered at post-graduate level — perhaps as a Master ofLocal Governance.

Serious engagement with the universities would bring the addedbenefit of generating increased academic interest in the sector (which isunfortunately very limited at the moment). Major research studies relat-ing to local government serve to stimulate public debate about the roleand direction of municipalities. Dialogue of this kind, in turn, can onlypromote the status and credibility of the sector as a whole.


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R E F E R E N C E S • 2 6 7

AAS 27 Financial Reporting by LocalGovernments 6, 65, 66, 67, 70, 74,75, 236–37

AAS 38 Revaluation of Non-CurrentAssets 68

Aboriginal and Torres Strait Islandercommunities 119

accessibility of local government 40accounting

accrual 64, 65, 74cash 71renewals 71–72

accounting standards 6, 65, 67, 68, 72

accrual accounting 64, 65, 74achievements of local government

232–38Advisory Council for Inter-Governmental

Relations 153, 248

agency theory 219–20agenda control 220Aldrich, JH 216Allan, P 88, 89, 90, 92, 96–97amalgamation of local government

79–97, 109, 119–21, 238, 246Ammons, DN 187annual reports 60, 64–65assets

depreciation 69, 71–74expenditure 39–40maintenance 72–73valuation 67–71

asymmetric information 163–64, 214, 219–21

Aulich, C 79, 85, 132, 136, 137Australian Accounting Standards Board

65, 68, 71, 76Australian Council of Auditors-General 67

Australian Institute of Urban Studies 93Australian Local Government Association

147, 149, 249Austria 18–19autonomy

fiscal see fiscal autonomylocal government 16–17, 86

Bailey, S 212, 213, 214, 215, 217, 223,225, 228

Baker, G 7–8, 117–38, 232Balmain Peninsula 90–91Balmer, C 248Banker, RD 193Barr, JL 226Barry, BM 221, 226Barton, A 66, 69Belgium 18, 26–27, 28Bell, C 105benchmarking 245–46Bjurek, H 189, 190, 192Borzel, TJ 159, 161, 170Boulding, KE 162Boyne, GA 212, 213, 215, 217,

223, 228Bradrach, J 162Brennan, G 216Breton, A 221Brisbane City Council 136–37Brock, WA 221–22Buchanan, JM 216, 221budgeting 126, 128bureaucracy

legal-rational model 124Mintzberg’s concept 124

Cadbury Committee 140–41, 153, 156

Canada 18, 25, 30

I N D E X

Carlon, T 69Carnegie, G 70cash accounting 71Caulfield, J 5, 13–34, 232Cetinic-Dorol, CJ 151Chang, S 189, 194Chapman, R 80, 87, 95Charnes, A 193chief executive officers

creation of position 127–28relationship with councillors 151–52relationship with non-executive direc-

tors 152–53role 139, 143–44, 147–51turnover rate 152

citizens consultative committee 155clientalism 14, 21collections, publicly held 70Commonwealth Financial Assistance

Grant 44, 53, 56, 58Commonwealth Grants Commission 41,

49, 61–62communitarianism 101, 107community, concept of 103–11community attitudes towards local

government 52–53, 232community education in local

government 59–60, 62community expectations of local

government 15, 37, 40, 49–51,59–60

community participation in local government 59, 103

community representation 85community studies 105Community Support Fund 111competition, forms of 213compulsory competitive tendering 131,

235condition-based depreciation 72constitutional recognition of local

government 1, 82, 85, 103contracts, executive 128Cook, WD 189, 190Cooper, WW 193corporate governance 139–41, 152–55,

234local government 142–44public sector 141–42

corporate management reforms 125–29corporate structure 127, 235corporations, as voters 114corruption 119, 224cost shifting 42, 44

in expenditure 48–49in grant income 44–48

Council of Australian Governments 103councillors

ratio to population 81, 109relationship with professional

managers 151–52, 219

role 139, 143–47, 155salaries 153training 153–54turnover rate 146

councils, number per state 83Crime and Misconduct Commission

119cyclical maintenance 72–73

data, benchmarking 245–46data envelopment analysis 181, 182–86,

189, 190–91, 192–93Davis, OA 226De Borger, B 189, 191, 192, 194, 196,

197deferred maintenance 72–73Deller, SC 188, 189–90, 194democracy, local 79, 101–16, 233–34democratic representation 85–87Denmark 18depreciation 69, 71–74deprival value 68deterministic frontier approach 180–81,

182–83, 188–89devolution of government responsibilities

to local level 42, 173distributional coalitions 223diversity of local government 3–4,

80–82Dollery, B 9–10, 79, 82, 84, 85, 95,

189, 194, 197, 212–28, 231–50, 247Domberger, S 188Downs, A 226

Eccles, R 162economics, local government 234–38economies of scale 79, 80, 87, 89, 90,

92, 120, 131, 247education, post-graduate, in local

government 249–50efficiency

and democratic representation 85–87determinants 195–98economic 222effect of community characteristics on

196effect of political composition of

council on 195–96political 222selective 221targets 61

efficiency measurement 176–211difficulties in implementing 186–88studies, local public services 188–95,

200–211techniques 180–86theory 179–81

efficiency reforms 62, 119, 138, 245–48integrating with public policy 136–37National Competition Policy 133–36Victoria 129–32

I N D E X • 2 6 9

elected members see councillorselections

media reporting 218political significance 217

electoral system, local government111–15

employment in local government 125,127, 235

employment practices 129Ernst and Young Management

Consultants 52European Union 173‘exit’ (means of influencing service

provision) 213–14expectations, public see community

expectations of local governmentexpenditure by local government

1, 49, 50, 51external reporting 64–77

failure, local government see government failure

fair value 68Faith, RL 216fees and charges, state government 48Financial Assistance Grant,

Commonwealth 44, 53, 56, 58financial pressures on local government

38, 61–62financial reforms 64financial reporting 63–77, 236Financial Reporting by Local

Governments (AAS 27) 6, 65, 66,67, 70, 74, 75, 236–37

financial statements 65Finland 18, 26fiscal autonomy 17–18, 28, 30, 31

measurement 28, 33fiscal illusion 224–26flypaper effect 224–25Forsund, FR 189, 192France 18, 26franchise, local government 111–15free-disposal hull approach 181,

182–84, 189, 191–92functions of local government 82, 103,

233funding, external, of local government

60–61

G4+1 (group) 76Gaebler, T 136Gambetta, D 167Geelong, amalgamation of local

government 94general purpose financial reports

65–66Germany 18, 22, 28, 30, 31Gerritsen, R 128Golany, B 193goods and services tax 57

governancecorporate see corporate governancelocal, capacity of councils to supply

171–75governance mechanisms

hierarchical 164–66market system 162–64network 166–71

government failure 212–28susceptibility of local government

215, 228taxonomies 213–28typology 212–13

Gramlich, EM 225Granovetter, M 168grants, central government 18–19

Commonwealth Financial AssistanceGrant 44, 53, 56, 58

cost shifting 44–48effects on local government

expenditure 224–25indexation 44, 47revenue recognition 75to Victorian local government 45–47

Grindle, M 215GST (goods and services tax) 57Guidelines to Reduce Conflict of Interest

in Councils 154Gustafsson, B 190, 192Guyra Shire Council 48–49

Hallebone, EL 94Halstead, JM 189, 190Hampel Committee 141, 153,

154, 156Hardin, R 221, 226Haward, M 87, 95Hawley, W 217Hayes, K 189, 194health care 48heritage assets 69Hindmoor, A 164, 165, 166, 167Hirschman, AO 175, 213, 216Hjalmarsson, L 189, 190–91, 192Hood, C 14, 16horizontal co-ordination 161Howell, R 86Hughes, OE 149

Iceland 18–19Independent Commission Against

Corruption 119industrial relations 121–22Industry Commission 187information asymmetries see asymmetric

information infrastructure, council-controlled 38–39Inner Sydney Inquiry 87, 92, 93, 97innovation in local government 122–23Integrated Local Area Planning Scheme 147interest-based networks 167–69


interest groups 221–23Ireland 18–19, 28iron triangles 221–24, 234issue networks 167–68Italy 26

Jamar, MA 191, 192, 193, 194, 195Japan 25–26Johnson, A 5, 37–62, 237, 245–46Jordan, G 166

Karpin Report on management 124Kazakov, A 189, 190Kenis, P 159Kerr, R 217, 218Kerstens, K 189, 191, 192, 194,

196, 197Kiss, R 7, 81, 84, 86, 87, 101–16, 233Kjulin, U 190, 192Kluvers, R 128KPMG 93Krugman, P 169

land tax 52, 54–55‘land under roads’ valuation 70–71Larsen, HO 15leadership, local 124–25, 127least squares econometric techniques

180, 181–82, 188legislation 102, 103, 118

cost benefit analysis 42implementation by local councils 40,

42–43Integrated Planning Act 1999 240Local Government Act 1993 127Local Government (Financial

Assistance) Act 1986 123Local Government (Financial

Assistance) Act 1995 56legitimacy of local government

15, 104, 107–11Leichhardt Council 90–91liability 73, 75, 76Llewellyn-Smith, M 95local democracy model 79, 85, 136local government acts 102, 103, 118Local Government Development

Program 147Local Government Managers Association

147Loughlin, M 217Lowndes, V 161, 162–63, 164–65,

168, 169, 172

Maclellan, R 94Magee, SP 221–22Mahoney, ME 94–95maintenance see assets, maintenance Management Plans, council 60management practices 147–48management reform 232–33

Commonwealth role 121–23general manager’s role 125states’ role 118–19

Manly Council 91Marsh, D 169Marshall, N 8, 9–10, 102, 139–56,

231–50Martin, J 132, 138May, P 6–7, 79–97, 238, 247microeconomic reform 234–35Miller, GJ 187Mintzberg’s concept of bureaucracy 124models of local government 79Moe, TM 219Moesen, W 189, 192, 196, 197Moore, D 93, 130, 132Morey, RC 193Mueller, DC 216Mulgan, R 151multi-organisational partnerships

160–61catalytic role of local government

172–73co-ordination problems 161–71complexity 163information asymmetries 163–64power asymmetries 163‘thin’ transactions 164transaction costs 163–64, 165

Municipal Association of Victoria 143

Narayan, D 171National Competition Policy 133–36,

234National Local Government Training

Board 122National Office of Local Government

84, 232National Review of Local Government

Labour Markets 122, 147Nelson, CH 190Netherlands, The 18–19, 23, 28, 30Networking the Nation program 123networks 159–75, 234new institutional economics 162new public management 13–14, 19,

124–38, 232, 235cross-country comparisons 15–16,

20–27, 27, 29, 32New South Wales

amalgamation of local government92–93

size of local government 88state-local government planning 241voting provisions 113, 114

New South Wales Local GovernmentGrants Commission 57

New Zealand 18–19, 21–22, 30, 84, 86

Newby, H 105Northwood, K 242

I N D E X • 2 7 1

Norway 18, 26, 31NPM see new public management

Oakerson, R 88–89Oates, WE 225O’Dowd, MC 212OECD (Organisation for Economic

Cooperation and Development)17–18, 28

Olson, M 221, 223, 226organisational structure of local

government 124Osborne, D 136out-sourcing 90, 235, 236

Pallot, J 70partnership agreements, state/local

238–42pensioner concessions 49performance information 66, 77, 176,

246performance measures, difficulties in

implementing 186–88Plan First 241policing 48–49policy advisers 220policy communities 167–69policy networks 159–75, 234policy role, local government 4political composition of council, effect

on efficiency 195–96political entrepreneurship 226–28political parties 217political representation 85–86population size 81

per councillor 81, 109relationship to political performance

85–86Proctor, C 242productivity 177–78, 179Proeller, I 23profile of local government 248–50program management 126program planning 128public choice theory 212, 213, 216public sector reporting 64–67Putterill, M 189, 191, 192

Queenslandamalgamation of local government

120community attitude towards local

government 232reform of local government 134–36state and local planning coordination

240–41voting provisions 114

Randwick City Council 92–93rate pegging 52rate revenue 51–52

reform, local government 13–34, 102local democracy model 85, 136process reforms 13public management model 136structural efficiency model 85, 136structural reforms 13, 83–84

Regional Organisations of Councils242–45

Reid, M 173renewals accounting 71–72rent-seeking activity 221–23renter illusion 225–26reporting

external see external reportingfinancial see financial reportingpublic sector see public sector

reportingreports, general purpose see general

purpose financial reports research on local government 1–3resource sharing 247responsibilities of local government 82,

103, 233Revaluation of Non-Current Assets

(AAS 38) 68revenue recognition 74–77revenue sources for local government

18, 44, 45, 80–81Rhodes, E 193Rhodes, R 166, 169Richardson, J 166Rodden, J 224role of local government 82, 103, 233Roll, Y 189, 190, 193Romer, T 220Rose-Ackerman, S 224Rosenthal, H 220Rouse, P 189, 191, 192, 194Royal Commission on Australian

Government Administration 125Rudnicki, ER 188Ryan, B 87Ryan, C 6, 63–78, 236Ryan, D 189, 191, 192

safety, community 48–49Sartor, F 91Savery, N 94Schedler, K 23Schmidt, P 183Schneider, V 159Seiford, LM 190Self, P 86services, provision of 79, 82, 97, 235

cost 41, 49–51impediments to 214means of influencing 213–14

services centre, shared 89‘services to the person’ 3, 4, 49–51‘services to the property’ 2, 4, 49–50Singh, S 224


size of local government 80–82, 87–89Skelcher, C 161, 162–63, 164–65, 168,

169, 172Smith, W 84, 85social capital 170–71social services, provision of 49–51Soul, S 82, 85, 88, 89South Australia

amalgamation of local government95–96, 109, 120

efficiency gains 120–21partnerships program 239, 242

Spain 18, 26, 30, 31spatially divisible public goods 223–24Sproats, K 87, 91, 97, 102standards, accounting 6, 65, 67, 68, 72state government fees and charges 48statutory positions 124stochastic frontier approach 181,

182–83, 189–90Stronger Families and Communities

Strategy 111structural efficiency model 79, 85, 136Sweden 18–19, 24, 30Switzerland 18, 23, 30, 31Sydney

Inner Sydney Inquiry 87, 92, 93, 97local government structure 87

Sydney City Council 92

Tasmaniaamalgamation of local government

95, 107–8, 109, 120, 121partnership agreements 239, 241voting provisions 113, 114

taxgoods and services 57land 52, 54–55

Teicher, J 94tendering, compulsory competitive 131,

235, 236Thornton, J 89Tollison, RD 216, 221Tonnies, F 105, 106Tourism Task Force 93town and shire clerks 124, 127Townsend, MA 94training 122, 153–54transfers, revenue 74–75, 76–77transparency 86, 245trust 166Tulkens, H 189, 191, 192, 193, 194, 195Tullock, G 221

United Kingdomfiscal autonomy 28, 31local government reform 91, 130new public management

development 20, 30revenue sources 18–19

United States 24–25, 28, 30, 91universities, role in building local

government profile 249–50urban parish 89Urgent Issues Group 72, 73user charges 18

Vanden Eeckaut, PJ 191, 192, 193,194, 195

Vann Gramberg, B 94Vanneste, J 189, 192, 196, 197Veiderpass, A 190–91Victoria

amalgamation of local government84, 86, 93–95, 102, 108–9, 120,131

community building 111efficiency reforms 129–32grant funding 45–47state-local government relationship 240voting provisions 113, 114, 115

virtual councils 80, 89–91, 96, 247Vitaliano, DF 189, 196–97Viton, PA 189‘voice’ (means of influencing service

provision) 213–14voter apathy 216–19, 234voting

alternatives to 216as consumption activity 216postal 114–15property-based 112–14, 115

voting provisions, local government111–15

WA Inc Royal Commission 119Wagner, A 51Walker, RG 66, 69, 73Wallis, J 8–9, 159–75, 212, 218, 221,

227, 233Walzer, N 190Weisbrod, BA 212, 218Western Australia, state-local

government partnership 240Wettenhall, R 232Whyard, M 128Wilks, S 166Wintrobe, R 219, 220, 221Witherby, AW 87, 89Wolnizer, P 70Woolcock, M 171World Bank 174–75Worthington, A 9, 176–211, 189,

194, 196, 197, 224, 225, 238, 245

Wright, M 166

Young, L 221–22

Zwart, I 95

I N D E X • 2 7 3

D E V E L O P I N G A U S T R A L I A ’ S R E G I O N S :T H E O R Y A N D P R A C T I C E

Andrew Beer, Alaric Maude and Bill Pritchard

The press and contemporary politicaldebate send conflicting messages aboutthe economic future of Australia’sregions. Developing Australia’s Regions:Theory and Practice is a book thatrecognises that regions matter – whattakes place in our diverse regions funda-mentally determines the nation’s quality of life. This practical bookdraws upon regional development theory, and national and internationalexperience, to set out the principles andstrategies that can be used to establish a stronger future for our regions.

ISBN 0 86840 548 5UNSWPRESS

Also published by UNSW Press