There is a big national productivity boost hidden away in under-performing and unaccountable local councils.
By John Kehoe
Have you noticed your council rates spiralling out of control despite no apparent improvement in local government services?
When Josh Frydenberg hosted state and territory treasurers in Canberra in October, the federal Treasurer pressed the states to ramp up productivity reforms.
What the Treasurer didn’t mention, which he perhaps should have, was a potential $10 billion productivity dividend over a decade that could be squeezed from local government through attacking lacklustre productivity and improving lax fiscal management.
Unless the federal and state governments take strong action on councils and hold their feet to the fire, rates will keep rising at more than double the inflation rate as they have over the past decade.
Residential council rates average about $1050 in NSW.
Many local governments around Australia operate inefficiently, mismanaging financial budgets and leaving poor old ratepayers on the hook for ever-increasing taxes.
Unlike federal and state politicians, they’re unaccountable, lack public scrutiny and don’t get much media attention.
A Productivity Commission review of local government found “relatively weak mechanisms to ensure the prudence and efficiency of expenditure”.
Council executives can earn $350,000 to $500,000 a year – making them among the nation’s highest-paid public servants.
The average full-time worker cost at the City of Sydney is about $124,000 a year.
There is nothing wrong with paying well-qualified and top-performing executives good money to deliver vital public services such as planning and development, rubbish collection, maintenance, gardening of parks, cleaning, waste management, street signs, soil testing, fixing roads and support services.
But the reality is some council executives are little more than bureaucrats who have worked their way up the local government ladder and have minimal experience managing a multi-million dollar business.
Expertise is often lacking and they are generally not performance-led or measured.
Local government wages have grown at double the consumer price index since 2008 – with scant evidence of productivity improvements to match.
Generous accruing sick leave and unrecorded leave on Fridays are not uncommon so workers can escape for long weekends.
Labour costs account for almost 70 per cent of total expenses.
LSI Consulting director Ian Fahy, who has been professionally analysing local government for 30 years in Australia and New Zealand, has developed a local government productivity index to try to fix the sector’s shortcomings.
The index measures services delivered by each council, relative to the income they receive from rates, user charges, parking fees and other regulatory income.
The index takes into account labour and other operational costs, including contractors. It allows for the number of dwellings in a council, population, population density and number of full-time staff.
In NSW alone, Fahy’s local government productivity index estimates there is $341 million a year in savings ($3 billion over 20 years in net present value terms) if councils operate more effectively and efficiently against a top-performing benchmark.
Nationally, a back-of-the-envelope extrapolation puts this at about $1.7 billion a year.
Fahy says the productivity index demonstrates a huge opportunity for councils to operate more effectively to deliver greater value for their communities.
“If implemented correctly, councils will be able to demonstrate to the community a strong value for money, fiscal leadership and better service provision through a highly skilled and productive workforce,” he says.
“They haven’t been able until now, to hold their councillors and council management to account for the overall performance of the council as a whole.”
“Communities couldn’t see if they are getting better value now for paying increased rates, and to determine if we are doing better than we did last year.”
The productivity opportunity lies in financial savings (particularly on labour costs), better asset management, saving on borrowing costs, enhancing investment returns on surplus cash, operational improvements and increasing workforce skills.
The analysis shows there is a huge variation in productivity performance – up to 60 per cent between the most productive council workforces and the least productive.
To mask their budget woes, local governments often capitalise their expenditure on small-scale infrastructure projects such as footpaths and sewerage plants.
This means the cost of projects is recorded on their balance sheets as an asset and only a small fraction is depreciated each year in the profit and loss statement.
The accounting trick – which commercial bankers have similarly been accused of doing for software expenditure – enables the full expenditure cost to be concealed, helping managers earn performance bonuses.
On top of the potential productivity saving, Frydenberg might be interested to learn there is also a potential saving for the federal budget.
The Commonwealth pays $2.6 billion annually to local governments. The general purpose grants are “untied” funding, meaning there is no quid pro quo to check the money is being spent efficiently and effectively.
That’s a departure from Labor Prime Minister Gough Whitlam who in the early 1970s oversaw a huge increase in Commonwealth grants to local government, but tied many of them to performance outcomes via special purpose grants.
An Australian Local Government Association report, representing 537 councils across the country, presented to federal and state treasurers earlier year said pressure on infrastructure from strong population growth meant the level of federal funding “needs to increase through Financial Assistance Grants and specific partnership programs.”
“At the state level, we need to remove suppression on local government revenue such as rate capping/pegging which limits the ability of councils to set their own property rates in response to community preferences and constrains their ability to provide the infrastructure needs to support development in our cities and regions.”
Technically, legislation in NSW only allows sizeable rate increases if local governments can demonstrate a productivity gain. But the state’s Independent Pricing and Regulatory Tribunal (IPART) finds this difficult to measure, meaning their productivity is theoretically measured and rate increases are usually waved through.
Thirteen councils recently applied for special rates variations. Eight were approved in full, three in part and only one was rejected by IPART.
John Kehoe writes on economics, politics and business from the Canberra press gallery for the AFR . He is a former Washington correspondent.
CCO Editor’s note: The above article was first published in The Australian Financial Review on October 31 2019. It is reproduced today in light of an article in The Sydney Morning Herald today about State Government proposing to give Councils the power to push up rates in a bill to be presented to State parliament next week. See today’s SMH article here; https://www.smh.com.au/politics/nsw/nsw-councils-to-be-given-more-flexibility-over-rates-20200505-p54q00.html
The original link for the above AFR article by John Kehoe is here; https://www.afr.com/politics/why-your-council-rates-are-skyrocketing-20191030-p535se