Consolidating a Council - Does Bigger Simply Mean ... Bigger?

Reviewing the Auckland experiment
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. 

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).

Figure 1: Residents per Council Employee, 2000-2018 

The downward slope indicates more employees relative to population, suggesting falling productivity. Of course, this may indicate changes in the scope of council activities, but it is hard to envisage a shift that would lead to a 26% fall in 8 years (as in Auckland) or even a 14% fall (as in the national median). And if costs rise faster than output, regional (and national) productivity suffers.

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. 

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 efficiency
Sound 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.

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 [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.

Auckland Planning: Doing Less with More

The burgeoning bureaucracy
In 2010 the eight Auckland councils were amalgamated into one.  I’m not sure why and my early prognosis gave the experiment five years before failing.  This was based on the unwieldy nature of the proposed council – multiple layers of management were bound to complicate and slow down decision-making and further remove policy-makers from the places and people for whom they are actually making policy.

More managers also means much higher wage costs, more internal meetings, and a reduced capacity to respond on the ground to the needs and wants of different communities and places. 

Talking, talking …
It was no surprise, then, to read the report in the Herald (4 April 2016) of 37 city managers attending a workshop on updating the Auckland Plan in February.  The manager of the strategic planning process for the Council justified this by saying that “input from different experts across the organisation and workshops are used as the most efficient and effective way to ensure expertise is shared across the organisation”. 

Talk about talking to ourselves!  And what have we got to show for it?

Well, most people are beginning to understand that the approach promoted in the Auckland Plan of using less land to absorb more development is pushing up prices for housing, costs for businesses, and congestion for commuters.  And these inevitable outcomes of rationing urban land can be compounded by inadequate infrastructure provision.

It’s certainly time for the council to have a rethink.  But I’m not holding my breath.  The last time planners recognised their plan for a compact city was not working, they simply argued for more regulation (in Growing Smarter, Auckland Regional Council 2007).

Getting grounded
The deficiencies of the current planning culture go further than the impacts of land rationing on property markets.   I’ve attended several hearings reviewing the Proposed Auckland Unitary Plan (the PAUP, a statutory document intended to implement the aforementioned Auckland Plan).  I’ve been struck by three things. 

(1) Private costs and commitments
First, there is the amount of time spent by the very large number of professionals drawn into the process: lawyers, independent planners, and a variety of experts (including the many consultant planners and experts commissioned by the council to advise its "different planners and experts" – go figure). 

The cost of all this to the wider community must be substantial – quite apart from the Council's $70m annual planning budget ($45 for every person living in the region).

(2) Getting grounded
Second, many private citizens are putting real time and thought into making submissions to a plan that has serious implications for them and their neighbours, their livelihoods and their lifestyles.  However, at the plan hearings in different parts of the region submitters addressing local, practical matters are up against by a centralised process and a complex and coercive set of regulations built in large part on supposition.

In fact, it is the many parties with a commitment to living and working in the region that anyone charged with thinking about the future of Auckland should be listening to, rather than talking to each other.  

Unfortunately, the groupthink taking place in Auckland Council excludes divergent views and local circumstances when they cut across the beliefs that mark the current planning culture.

Institutional myopia generally is one of the reasons we end up with dubious decisions by large organisations out of touch with their public. This has already been demonstrated in the Council’s faulty assessment of housing capacity behind the proposed Auckland Unitary Plan.

Hopefully, the Plan Review Panel will counter such narrow thinking and ground the PAUP in reality rather than theory.

(3) Push back
Third, council officers and consultants seem almost inevitably to push back against any deviation from the PAUP proposed by submitters, implying that the principles they have adopted should prevail over the knowledge, aspirations, and circumstances of households, businesses, and community groups. 

Even when council officers change their position in the face of the evidence, it seems often to be to draw back from increasing flexibility or providing for wider development opportunities, even to the extent of retreating from provisions set out in the PAUP as originally notified.  

This might be acceptable or understandable if we are confident that the Council has properly identified and prioritised the issues, objectives and policies in the first place.

House of cards?
Unfortunately, we can’t be.  Drilling down into some of the material cited in the hearings and the documented rationale for various objectives and policies in the PAUP (contained in Section 32 reports) is disquieting.  There is a plethora of material, it is difficult to access, not especially conclusive, and in many cases, hard to relate to the policies it purports to support. 

A lack of clarity or critical analysis means that much of this material appears irrelevant, dated, or contradictory.  This raises the uncomfortable thought that despite its budget, the quality of expertise bought to bear on planning in Auckland does not match the challenges associated with a region of 1.5 million people (and growing), compared with preparing plans that deal more directly with the circumstances of different areas within the region. 

Consolidating planning and plans (and truncating the process) with the aim of streamlining is beginning to look like a step in the wrong direction.

Or less charitably, it may indicate that the quality of our planning is not up to the challenges of reconciling sound environmental management with the diversity and volatility of modern urban development.  This has serious implications, including that of not providing for the housing and employment needs of a population that the planners expect to continue to grow strongly for the foreseeable future.

When is more too much?
All of this led me to revisit Auckland local government employment numbers.  I haven't dug up the numbers employed directly in planning.  But the overall Auckland figures increased 8.8% over the two years to 2015 compared with just 2.2% for the rest of New Zealand.

In fact, Auckland’s local government employment jumped by over 50% from 2010 to2015!  The rest of New Zealand experienced just 5% growth.  (This included 23% growth in Canterbury, a short-term boost attributable presumably to the response to the 2010 and 2011 earthquakes). So much for the greater efficiencies trumpeted for amalgamation.


Worringly, 50% growth in local government employment compares with an estimated 9% growth in population and less than 13% growth in other employment over the same period.  


In this case, more may be less
Auckland is clearly putting more resources into local government. It’s hard to see the benefits this is delivering to a city struggling still with expensive land, inadequate transport infrastructure, inappropriate land use, and an intrusive planning culture which appears to be promoting more rather than better regulation.

Local Governance, Amalgamation, and Productivity: Is Bigger really Better?

So much for savings from amalgamation
Burgeoning wage costs at Auckland Council are no surprise. They are not an unexpected outcome given that consolidation of local councils generates additional organisational tiers, calls for more managers, and demands greater attention to internal coordination and bureaucratic processes.

I noted a couple of years ago that the costs of Auckland's super city, established in 2010, were already outrunning the combined costs of the eight councils it replaced: 

the operating budget for Auckland Council in 2012/13 is $2.8 billion compared with the collective 2008/09 operating expenditure of the eight councils identified of $1.95 billion (see Royal Commission Report Appendix B). Spending growth of 45% (or $721m) in 2009 dollars compares with just 8% inflation between 2009 and 2012. Transition costs alone can’t explain such a jump - the Royal Commission suggested that at most transition would cost just $60 million a year for four years.

Expansion, ossification, and eradication 

The prediction that employment costs would increase was not so much insightful as stating the obvious. Quite apart from the evidence of diseconomies in over-blown municipalities, anyone who watched the decline and dismembering of New Zealand’s largest corporates in the 1980s and ‘90s could see it coming. Some of our largest companies (Watties, Fetcher Challenge, New Zealand Forest Products, Waitaki NZ Refrigerating, and Carter Holt Harvey) went through a sequence of slow growth, consolidation, and ultimately dissolution. Different parts were downsized, sold off, or shut down and assets stripped as the quest for productivity gave way to the struggle to survive.

Councils are not immune to the conflation and ossification that come with size. But before we predict the unwinding of Auckland Council we need to ask if high costs are simply a response to growth. 

The analysis

To explore this we analyse trends in local government employment relative to population using Statistics New Zealand Census population and employment data (2000 to 2013).

There are limits to this analysis. To really understand why a single council is costing Aucklanders more than those it replaced requires in-depth analysis. It needs to account for changed practices, changes in the mix and levels of services, changes in funding practices, and so on. Nevertheless, the analysis below helps raises serious questions regarding the costs and benefits of amalgamation.

City hall slimmed down? Yeah right
There was a slump and then a jump in local government jobs in Auckland after the new council was formed (Figure 1). So much for trumpeting job cuts in 2010! This was simply a transitional aberration. This is even more obvious when we compare shifts in jobs with shifts in the population local government serves. Local government employment grew ahead of population in Auckland continuously to 2010. Then, after the dip associated with transition to single council, jobs took off again, vaulting way above the already worrying medium term trend.

 

Figure 1: Changes in Population and Local Government Jobs: Auckland, 2000-2013

Benchmarking Auckland against the Rest of New Zealand
Growth in local government employment also grew faster than population across the rest of New Zealand . Table 1 shows this using 2010 as a benchmark date. It also shows includes changes in jobs per thousand residents – a surrogate for labour productivity: the higher the ratio the less productive local government employment is.

While Auckland’s population grew by 22% between 2000 and 2010, council jobs grew by 65%. This means it took 35% more people to administer local government relative to the population in 2010 compared with 2000, which suggests an annual average “productivity decline” of 3.5%. And that figure increased after consolidation, by 21%, to 7% a year. 

 

Table 1: Indicators of local Government Growth and Productivity

 

Local government productivity in Auckland declined by 35% (as measured here) between 2000 and 2010, but by only 21% across the rest of New Zealand.  This divergence increased between 2010 and 2013 when Auckland's productivity fell by 38% over just three years, while it fell by only 1% in the rest of New Zealand. 

While the measure of productivity is crude, the growth of council employment relative to population raises a fundamental question: where do the gains from amalgamation actually lie?

The productivity mix
Among sectors that can be identified from the statistics as providing local government services administration apparently experienced the biggest decline in productivity over the past three years (Figure 2). Front-line activities like public transport, museums, the zoo, and gardens actually lifted their productivity between 2010 and 2013. These gains may reflect demand rising ahead of population and employment as well as from operating improvements. However, recent gains follow falling productivity earlier in the decade. And gains in public transport have been on the back of plans and investments made before the 2010 reforms.

In fact, earlier gains in the water and drainage sector halted after 2010, while productivity in solid waste services has gone backwards. Given that these are sectors with generally stable technologies and predictable demand, this outcome is of some concern. But it is more worrying that local government administration, has apparently fallen behind the delivery of local services.

Figure 2: Shifts in Productivity by Local Government Activity

Benchmarking against other centres

A comparison of productivity scores for 18 New Zealand cities ordered from largest (Auckland, 1.5m residents in 2010) to the smallest (Upper Hutt, 41,000 residents) shows that size has little to do with performance (Figure 3). 

 

Figure 3: Comparing Changes in Productivity Across Cities

Moreover, from having the lowest score going into 2010, Auckland's index was bettered by eight councils just three years later. These included Porirua, Gisborne, Nelson, Hastings and Whangarei, among the smallest of the country’s cities. In fact, Auckland was the 16th worst performer between 2010 and 2013.

The index used here has its limits. Population is not necessarily the best measure of demand for different services. Comparison may be influenced by the different mix and quality of services offered by different councils. If nothing else, though, the comparison raises questions over how far and why consolidation should be promoted elsewhere.

So what does this mean for future amalgamations in New Zealand?
In 2012 I suggested that it was too soon to tell how the

Auckland experiment was going. A couple of years on I wonder how long we have to wait to see any fiscal or economic benefits. There is no evidence that consolidation has improved productivity. The other, less tangible benefits claimed for it - speaking with one voice being the obvious one – appear to have come at a significant cost.  This is being reflected in charges to ratepayers and the rate of increase in indebtedness.

Whatever the reason for these results, the Local Government Commission should be wary of emulating the Auckland experiment elsewhere.  This includes Wellington where there is considerable political momentum behind proposals for council consolidation. Amalgamation is a perceived solution to issues of local governance that may be more imaginary than real, a solution that we may not be able to afford.  It appears that Aucklanders are already paying the price.