This is the fourth post reviewing the progress of Auckland Council following the amalgamation in 2010 of seven territorial and one regional authority and the reorganisation of transport and water delivery agencies. The aims included greater regulatory consistency across the region, the capacity to make adequate, coordinated provision for growth, and cost savings.
The story
so far
The previous posts looked at trends in Auckland
Council from 2012 to 2018: employment up 17%; employment costs up
24% (in real terms); operating expenditure up 26%; total revenue up 51%. The leap in revenue
reflects spending on property, plant and equipment, up 32% in 2018
compared with 2012, or NZ$11bn over the period. All this, while population grew
by around 15%. Despite the jump in costs and funding, we can’t label the Auckland Experiment a failure on the evidence so far. So this post adds to the analysis by looking briefly at performance, albeit in general terms. It looks at broad efficiency trends by comparing Auckland with New Zealand’s other regions. These include unitary councils (regional and local functions combined) and multi-council regions.
But first a couple of scene-setters. What is
the role of councils? And how might efficiencies arise from amalgamation and
operating at a larger scale?
Skip these
two boxes if you just want to look at the numbers.
Scene Setter 1 - What councils do (or should do)
There are good arguments for local councils to
oversee the provision of local public goods where the market won’t deliver or
where there are natural monopolies. It is also appropriate for them to levy
rates over property to do so, and to charge directly for the services they
provide.
Obviously council roles will change as shifts in
technology or behaviour create competition where none existed before (and they
consequently pull out of infrastructure or service delivery) or where the
public appetite for amenities changes (for example from passive to active
reserves).
It is important, though, that property rates relate
to the infrastructure provided, and that charges for services relate to the
fair cost of their production. It is also important that councils produce
infrastructure and services efficiently. Unduly high costs penalise residents and businesses, reducing a city’s competitiveness and
attraction.
Councils also have an obligation to continuously
review and evaluate what infrastructure and amenities should be
provided, where, and when. In this they are required to reflect on
constituents’ needs and preferences, engaging with the community through
survey, consultation, submissions, and, ultimately, the ballot box. This is
necessary to legitimise new activities and allow cross-subsidies between
services, areas, or generations.
Discretionary council decisions should also: be legal,
reasonable (both matters that may be contested in the courts), and should not
unduly lower efficiency.
Scene Setter
2 Potential efficiencies from
reorganisation
There are the three ways by which efficiency might
be improved through local government consolidation and reform:
Administrative gains: from lowering administrative,
compliance, transaction, and regulatory costs. Processes may be
streamlined, duplication eliminated, best practices implemented, and economies
of scale gained (increasing what is achieved by more than what it costs).
Technical gains through improved financial capacity to invest in
new systems, processes, and plant to lift output, enhance outcomes, reduce
service failures, and lower costs.
Allocative gains from delivering the most appropriate mix of goods
and services, and making effective use of capital to best deploy people and
plant to achieve desired outcomes.
Measuring
gains
In this post, I consider the efficiencies
in Auckland Council that should come from administrative and
technical advances using changes in two measures: the number of local government employees and operating expenditure per head of population.
Auckland
Council numbers are compared with numbers for all New Zealand regions from
2000 to 2018. Following the logic justifying amalgamation, the
creation of Auckland’s large unitary council in 2010 should have increased the residents served
relative to council employment numbers and lowered costs to residents more than
in regions with smaller, multiple councils. And within Auckland we would
expect council costs to decline relative to population.
The indicators used assume that the council output is a function of
population. This is a high order assumption, over-riding differences in the mix
and quality of amenities and services and differences in the physical environment of regions. Equally, employee numbers is also only an
approximate measure of inputs.
While these assumptions keep analysis simple, they also limit the conclusions that can be drawn.
Employment
up, productivity down?
We know employment growth has been modest within the enlarged Auckland Council, confined to Council Controlled Organisations. However, the costs of council employment have risen significantly, in part through staff movement into higher-paid bands.
We know employment growth has been modest within the enlarged Auckland Council, confined to Council Controlled Organisations. However, the costs of council employment have risen significantly, in part through staff movement into higher-paid bands.
To consider the bigger picture, the number of residents in each of the 16 regions was
divided by the number of people employed in local government administration and in water supply,
sewage and drainage servcies (sourced from Business Demography, Statistics NZ). The higher the figure, the more productive a region is
(fewer employees relative to residents). The line should rise if
productivity is improving.
The results for Auckland and the median for all regions have been plotted in Figure 1. Auckland stands out as more productive than most regions, but contrary to expectations, more so before the 2010 reforms than after. Other strong performers are smaller regions with unitary councils (Gisborne, Nelson, and especially Tasman).
The results for Auckland and the median for all regions have been plotted in Figure 1. Auckland stands out as more productive than most regions, but contrary to expectations, more so before the 2010 reforms than after. Other strong performers are smaller regions with unitary councils (Gisborne, Nelson, and especially Tasman).
Figure 1: Residents per Council Employee, 2000-2018
While
Auckland ranks well against other regions on this
measure (see the bar graph and right-hand scale), its steep downward slope and
convergence on the median across regions is inconsistent with expectations of economic gains
from consolidation (despite the recovery in 2017).
Expenditure:
more for less?
Operating expenses (sourced from Statistics NZ)
have been summed for councils in each region from 2000 to 2017, converted to
2018 dollars and divided through by regional populations. In theory,
expenditure per head should fall as councils become more efficient, and should
be lower in larger councils, Auckland being the obvious example (see the Scene
Setter 2, above).
Well,
neither expectation appears to hold. Operating costs per employee have been
increasing. In Auckland there was some moderation after 2012 but it is
difficult to distinguish its performance from the median for all councils in Figure 2.
Figure 2 also includes high and low performers. The best performing regions fall below the lower quartile and the worst above the higher quartile. The single best performer recently has been the Hawke's Bay with its population concentrated in the twin cities of Napier and Hastings. The worst has been the West Coast with its sparse population spread over a physically challenging area.
Figure 2 also includes high and low performers. The best performing regions fall below the lower quartile and the worst above the higher quartile. The single best performer recently has been the Hawke's Bay with its population concentrated in the twin cities of Napier and Hastings. The worst has been the West Coast with its sparse population spread over a physically challenging area.
The key observation, though, is that efficiency as measured here has not improved in Auckland which continues to sit around the middle of the pack.
Figure 2: Council Expenditure per
Resident, 2000-2017
What can
we conclude?
On
the measures used here, local government costs are moving ahead of population growth in most regions. Auckland is no exception. At best, te city has maintained efficiency in line with other regions. Consolidation of Auckland's councils has not been enough to reverse a decline.
As noted, these measures of efficiency assume a similar mix and level of services delivered by the consolidated council as delivered under similar conditions by councils in other
regions, and as delivered by the previous Auckland councils. At the level this analysis, our most robust conclusion is that the measures used provide no evidence that consolidation has lifted Auckland's game. To date, the costs of consolidation have not yielded obvous benefits.
Exploring why means looking into allocative efficiency: is the additional funding Auckland Council is receiving being allocated to investments that lift productivity as they deliver
better services? In the absence of evidence of better performance the consolidated council does not hyet yet appear to be on the path to
savings. And if Auckland is
going to deliver on the promise of 2010, can we afford the spending evidently
required to get there?
→ An aside on allocative efficiencySound allocation decisions are necessary to deliver operating gains: spending the right amount on the right things and getting the right people to put them in place. In Auckland Council resource allocation is driven in large part by Council Controlled Organisations. The quality of resource allocation decisions needs unravelling at that level.
However, it is timely to note that a recent internal report regarding decision-making for
cycleway investment by Auckland Transport identifies that spending was
justified by over-estimating demand. This is on top of major
under-estimates of the cost of the Central Rail Link which was justified
on the basis of a $2.3bn budget in 2011 (and a series of
assumptions that were hardly grounded in reality). That budget had (predictably) blown out to
$3.4bn by 2016, and continues to climb, with no clarity on where it will end up.
These examples confirm how large organisations are prone to resource misallocation; the larger the project the more likely it is to blow out, and the bigger any over-run will be. The impact of failures in resource allocation decisions in a large council can be
further-reaching than similar failures by smaller organisations, given the increased funds at their disposal. And placing a substantial share of the increased funds in CCOs at arm's length from the political process may be no remedy. Poor spending decisions by councillors or their agents and advisors can lead to uneconomic investment: over- or under-capacity, in the wrong place, badly timed, or over-priced. The end result? A drag on city efficiency and productivity.
[1] There is a difference. Efficiency refers to how well tasks are done, and specified outcomes achieved. Productivity requires that those outcomes are the correct ones.
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