Around the world, many governments have favoured municipal amalgamation to improve efficiency of service and deliver cost benefits through economies of scale. But is bigger really better? Dr Colleen Rigby and David Robson look at the facts.
The concept of amalgamation is the voluntary or forced merger of multiple small local governments with a larger municipality to form a large metropolitan area. This is not an entirely new concept to New Zealand where radical restructuring in 1989 saw 700 councils and special purpose bodies merged into 86 local authorities.
Fast forward to just a few years ago and this behaviour was continuing in the ‘A Better Hawkes Bay’ (ABHB) model of consolidation campaign which sought the merger of all five councils in the Hawke’s Bay Region with a view that large merged authorities would drive faster regional growth and development.
The consolidation in the Hawke’s Bay Region rested on arguments presented in reports which advocated cost savings and the importance of regional leadership of a single amalgamated local authority.
This amalgamation, along with a coinciding proposed Wellington merger, was rejected by the public in a poll last year. However, Auckland, with a third of the population, had already proceeded with amalgamating eight councils in 2010.
The case for amalgamation
At the 2015 LGNZ Annual Conference, then Minister for Local Government Paula Bennett said that the large reorganisation for Greater Wellington and Northland had been taken off the table and that she would not legislate for large amalgamation, but that local government could not continue as it is.
One can argue that the current structure of local government does not strategically or cohesively support growth. For instance, the population of the Waikato Region is 382,713 (2015/2016 estimate) with the region serviced by 11 local authorities each offering similar core functions of water, wastewater and local roading systems and all running independently from one another.
It is clearly time for sustained change. But is large amalgamation the answer? The government has already stated it has no interest in imposing unwanted change. Yet there is a perception that bigger is better and sometimes the argument comes down to which area should be the ‘flagship’. At a political level, this is a minefield.
A tale of two cities
The Auckland ‘Super City’ was established in 2010, combining the functions of eight councils. In December 2014, the Local Government Commission (LGC) published a draft proposal for a similar arrangement in Wellington. To put this into context, this would mean that almost half of the country’s population would be governed by two councils.
The Wellington proposal largely mirrored the Auckland model in that it would take on all of the responsibilities, functions, powers, assets, liabilities and obligations of the current regional, city and district councils. The proposal also included that the single council would, as per the Auckland model, have eight local boards to share decision-making with the governing body.
When the matter went to the poll, only 30 percent of voters welcomed the option.
In 2005 the Local Government Advisory Board commenced an enquiry into amalgamation of seven of Australia’s most affluent areas in Perth’s western suburbs with a proposed saving of up to $2 million by 2015.
Perth is the fastest growing city in Australia and the plan sought to meet its needs through improved economies of scale and the provision of better coordination across the metropolitan area, through the strategy of influencing growth through the provision of supporting infrastructure.
Premier Colin Barnett defended the arrangement as unforced, saying time had been taken to explore options, legislation had not been written for it and it was simply bringing about something that was “long overdue with 69 councilors for the Western Suburbs being too many”.
However, the amalgamation was not without opposition. One of the first issues was the preserving of local character and also where the centre would be given that Fremantle had already featured as the centre in Western Australia’s long-term planning model, ‘Directions 2013’. However, the ensuing poll saw almost 78 percent against the arrangement in South Perth and just under 88 percent against it in Kwinana.
Back in NZ
Over on this side of the Tasman, the Local Government Act 2002 provides three criteria which dictate decision-making processes on local government restructuring:
- Promoting democratic local decision-making;
- The cost-effective delivery of services;
- Improved economic performance in the wider economy.
Amalgamation may have failed on all three of these criteria.
On the first criterion of local democracy, smaller and rural areas have expressed the opinion that their views have not been adequately considered.
On the second criterion of cost effectiveness, in the Auckland case there are two notable failures: One IT project budgeted at $71 million, ran a year late and $100 million over budget (NZ Herald, 2014) and the 2014 wage budget was exceeded by $50 million as the number of staff paid in excess of $100,000 has risen by over 50 percent in the past two years alone.
On the third criterion and the extent by which a council can influence economic growth, there is no evidence that the size of a council is able to dictate this.
Forecast savings of amalgamation and actual savings can often differ dramatically. In Canada, the Toronto amalgamation in 1998 reported the achievement of cost savings in excess of C$100 million. However, the actual cost of amalgamation was estimated to be between C$275 million and C$400 million.
The 17 percent savings expected in the South Australia amalgamation was in fact only two percent.
In the proposed Wairarapa amalgamation, a Morrison Low report estimated that it may be possible to achieve savings of approximately two percent (approximately $327,000) in relation to materials and contracts across all activities, excluding roading and solid waste.
However, later in the same report Morrison Low added that much of the real benefit of amalgamation would result from increased capacity and capability of the council organisation and improved management, coordination and integration of networks and services across the Wairarapa.
In other words, physical cost savings are questionable and the real value will be a result of economies of scale, increased purchasing power and increased organisational capability and capacity.
Amending the purpose
The ‘Better Local Government’ reforms in New Zealand set out a list of work streams, one of which concerns the efficient delivery and governance of local authority services. Amongst the LGA 2002 there are provisions for:
- Greater encouragement for local authorities to collaborate and cooperate;
- Enabling the Local Government Commission to create council-controlled organisations and joint committees as part of a reorganisation scheme;
- Clarification relating to the transfer of responsibilities from territorial authorities to regional councils.
In essence, this is the role of local government: providing good quality local infrastructure, public services and regulatory functions at the least possible cost to households and business. The government-appointed investigating advisory group recommended cost savings through collaborative, amalgamated regional delivery of transportation, water and infrastructure functions via economically efficient lines or a council controlled organisation (CCO). It was also recommended that the Local Government Act 2002 be amended so that it can facilitate, as opposed to obstruct, collaboration between councils or with other partners.
The findings of the Australian 1997-98 Local Government National Report support this in that there was no systematic relationship between council size, savings and sustainability – fundamentally undermining the ‘bigger is better’ theory and suggesting pursuit of alternative models of local government in the cooperation of resource sharing and regional alliances.
Roading and water services are well placed for regional delivery and economies of scale. These functions generally account for about one third of council expenditure and an emerging best practice is that of a region-wide CCO for water and/or roading services provided by local authorities, whilst maintaining unitary delivery of the remaining services.
It is common sense that individual councils should not work in isolation and should be actively engaged and networked in the development of strategic, mutually-beneficial shared service arrangements. In other words, doing existing activities better and more efficiently together, rather than doing different things alone.
It appears that local authorities in New Zealand are already trending towards strategic collective arrangements. In 2013 Hamilton City Council formed an alliance with an external engineering agency for roading maintenance and renewals for a period of 3.75 years, which to date is proving to be an efficient model for service delivery.
The formation of a CCO similar to the Auckland Watercare arrangement for Hamilton City, Waipa and Waikato District Councils to manage nearly $1 billion worth of water infrastructure has, in principle, received the backing of elected members.
Under the model, councils would retain ownership of stormwater assets, but outsource management to a formed water company.
The project has to date cost $650,000 (between three councils) with savings estimated to be more than $468 million over 28 years (stuff.co.nz, 2015).
A ‘part amalgamation’ model may provide the solution through the CCOs for water services and roading whereby the participating councils control 50 percent or more of the votes and/or have the right to appoint 50 percent (or more) of directors or trustees.
This would allow organisations to pick ‘the best parts’ of amalgamation models, consider the failures of others and design a tailored arrangement.
Governed by boards of directors or trustees, and operating at arm’s length to the council, the CCO is accountable to the council, which determines the objectives for each CCO and monitors its performance, thus maintaining core business focus.
As the public are able to provide input to the CCO board’s consideration of its statements of intent (SOIs) at meetings, the CCOs must hold these meetings in public, which enables public inclusion.
Despite the historical forecasted and actual costs, there is no proof to date that amalgamation works well, but the notion of networked, efficient core local government functions is sound. From a community perspective, forced consolidation is ineffective, but this does not suggest that the Better Local Services initiative of regional shared services arrangements and CCOs aimed at delivering economies of scale would fail or prove unpopular.
The water and roading examples each have a cautionary lifespan as opposed to the permanency of full amalgamation. Despite many overseas councils having to de-amalgamate, there appears to be no proposed best practice model of de-amalgamation and given the costs discussed in relation to the amalgamation process, it can only be assumed that the de-amalgamation process will be expensive. CCOs offer a better alternative than full amalgamation.
- Dr Colleen Rigby is the MBA director at Corporate and Executive Education, Waikato Management School at The University of Waikato. email@example.com
- David Robson is risk and internal manager at The University of Waikato. He was previously senior risk manager at Hamilton City Council. firstname.lastname@example.org
This article was first published in the May 2016 issue of NZ Local Government Magazine.