OPINION: De-merger perspective

Adjunct Professor of Economics Tim Coelli has weighed into the de-amalgamation debate by providing some background information for interested residents.

OPINION: Tim Coelli, adjunct professor of economics and owner of Twisted Gum Wines, has shared some insight into the de-amalgamation proposal. Picture: Liana Walker

IN RECENT times I have offered to provide some professional assistance to the Granite Belt Community Association in their de-amalgamation endeavours (on a volunteer basis).

Before making this offer I had begun some research on the costs and benefits of past de-amalgamations in Queensland and how this might relate to the Granite Belt de-amalgamation case.

I discovered that some of the estimates of costs of de-amalgamation (eg $15m) suggested by some people appear too large. I have hence decided to write this letter to provide guidance as to what we might discover when a detailed financial analysis is conducted.

However, I should emphasise that this letter expresses my personal opinions and not those of the Granite Belt Community Association, Granite Belt Wine and Tourism, University of Queensland nor any other organisation or group I may be associated with.

Introduction

Is the Southern Downs Regional Council doing a good job? In my view they are doing a reasonable job, when one considers the seriously flawed amalgamated model they have been forced to deal with over the past 10 years.

If residents of the Southern Downs and Granite Belt are unhappy with the performance of their council, the election of new councillors will not solve the problem, only de-amalgamation will solve the fundamental problems that exist.

When the forced amalgamation occurred in 2008 both the Warwick Shire Council (WSC) and Stanthorpe Shire Council (SSC) strongly opposed the proposed amalgamation. For example, see the very clear and convincing summary of arguments put forward by both councils contained within the Local Government Reform Commission report (reference #1).

The old WSC and SSC areas are fundamentally different in many ways.

The needs of the two communities are fundamentally different and as a result we have seen an immense frustration expressed by many residents in the Granite Belt community with the "one size fits all” policies of the SDRC that understandably tend to be designed for the larger former WSC area. I fully understand that having two sets of policies for the two sub-regions is politically infeasible within a single council. The only viable solution in my assessment is de-amalgamation.

Costs

The proposed Granite Belt Regional Council would be required to pay all costs of de-amalgamation. Some argue de-amalgamation will be too costly for the Granite Belt. I do not agree. I believe the "do nothing” alternative will be much more costly to the economy and community in the Granite Belt.

Regarding costs, there are two key questions to ask:

Will annual costs (and hence rates) go up because the new Granite Belt Regional Council is too small?

What will be the one-off costs of the de-amalgamation process, for example costs of new signage and creating separate accounting and computing systems?

Likely effect on annual costs and rates

First, we note that the old SSC had been in existence for many years and was in a very sound financial position prior to the forced amalgamations in 2008. For example, see the Queensland Local Government Comparative Information 2006-07 report (reference #2) where the levels of cash reserves versus borrowings are very healthy compared to many other councils at the time.

Second, one of the main motivations of the Beattie government for the forced amalgamations of councils was to achieve cost reductions via economies of scale.

I have a PhD in economics and prior to coming to the Granite Belt in 2007 I was professor of economics at the University of Queensland, where I had a particular interest in the analysis of economic performance measurement in government agencies. I have studied the relevant Australian literature on this topic and concluded there are unlikely to be any substantive economies of scale in local government in Australia. For example, I draw your attention to a recent study by academics from the highly regarded Centre for Local Government at the University of New England. In their study of relative efficiency in NSW local councils, published by Drew et al (2015) in Economic Papers, they conclude that:

"The public policy implications arising from these empirical estimations are significant. In first place, the empirical estimates generated in this paper appear to refute the common (if largely unsubstantiated) 'bigger is better' council population size arguments employed to justify compulsory council consolidation.” (reference #3)

In addition to these academic arguments, I am unaware of any hard empirical evidence proving that the amalgamations in Queensland in 2008 have resulted in general cost savings or rate reductions over the past 10 years. But there is certainly anecdotal evidence of substantially increased costs and rates in a number of cases, the SDRC being an example.

The higher costs incurred by an amalgamated council would not be a surprise to many people. In the case of the SDRC one would expect additional costs associated with regular travel by councillors and staff between the two major centres of Warwick and Stanthorpe. There is also the cost of the extra layers of administration required to manage and synthesise the various offices, depots, water supply, wastewater, hard waste facilities etc in the two centres, along with the extra hours needed to fit a single set of rigid policies into two vastly different communities.

Would a wise businessman buy an electronics factory in one town and a clothing factory in another town 60km away, force them to use the same management team and systems and then expect to achieve scale economies from the new business structure? This is arguably a silly analogy, but perhaps not entirely...

Possible one-off costs of de-amalgamation

Now let us consider question #2 above: what might be the one-off costs of the de-amalgamation process? This is a more difficult question to answer without access to the detailed financial accounts of the SDRC. However I do note that all of the key pre-amalgamation assets are still in place and in use. The council chambers, the civic centre, the library, the art gallery, the works depot, the water supply plant, the waste water treatment plant, the hard waste facility, and so on. Furthermore, many council staff members still live and work in the Granite Belt.

Regarding costs, one can be guided by the costs incurred by the four council de-amalgamations that took place in 2013 in Queensland, namely Douglas, Livingstone, Mareeba and Noosa. Our most reliable source of information on this topic is contained within the 2015 report of the Queensland Auditors Office (reference #4). From the table of costs contained in Figure 3C in that report, I calculate an average total cost of de-amalgamation of $4,856,311 across the four councils, with average operating costs of $2,404,643 and average capital costs of $2,451,668.

In my view these capital cost figures should be viewed with significant caution, since capital goods provide a stream of services over a number of years and hence these costs should be spread over the expected lives of the capital assets concerned, which would conservatively be 5 to 10 years.

It is important to note that the numbers within the Auditor's report have been challenged by the councils concerned. For example, refer to the letter from Noosa Regional Council (NRC) on page 83 of the Auditor's report (reference #4) where NRC states that their total costs were not $4,356,576 but only $2,613,575 when the definitions in Section 35 of the Local Government (de-amalgamation Implementation) Regulation 2013 are correctly followed. It appears that the Auditor chose to follow the methods used by the Queensland Treasury Corporation in 2012 instead of the definitions specified in the actual Regulation. It is unclear as to why the Auditor chose this option. Furthermore, one expects that it was the lower figure that was actually paid by NRC to the Sunshine Coast Regional Council to cover the costs of de-amalgamation, given that it would be bound by the wording within the Regulation.

Next one should note that the councils involved in the above four de-amalgamations were all substantially larger than both the SDRC and the proposed GBRC. Hence one would expect that the costs associated with changing signage and reorganising records associated with the various assets and rateable properties, etc. would be considerably less in a smaller council. Using statistics from the Queensland Government Statisticians Office (reference #5), the average population size of the above four breakaway councils in 2013 was 30,178, while the average size of the amalgamated councils was 167,206. This should be compared with the 2017 population of the SDRC of 35,542, of which the proposed GBRC would have an estimated population of 12,000.

Using the above population figures we observe that the SDRC size is less than one quarter of the average amalgamated council size and the GBRC size is considerably less than one half of the average breakaway council size. As a result, I would consider it prudent to estimate that the total de-amalgamation costs faced by the GBRC would be approximately one half of the average costs reported above. That is, total costs of $2,428,156, comprising operating costs of $1,202,322 and capital costs of $1,225,834.

Next let us recognise that the above figures are primarily in 2013 dollars while below we will compare them to SDRC budget figures in 2017 dollars. If we allow for possible cost inflation of 3% per year we obtain an estimated inflation factor of 12.55% for the four year period. Applying this factor to $2,428,156 we obtain a figure of $2,732,890.

To put the above figures into perspective, the 2017 SDRC Annual Report (reference #6) lists Total Recurrent Revenue of $75,914,000. Dividing this by one third to estimate the Total Recurrent Revenue of the proposed GBRC we obtain a figure of $25,305,000. Thus we observe that the estimated amount of $2,732,890 would be less than 11% of the estimated Total Recurrent Revenue in one year, which would be less than 2% per year if spread over a 6 year period.

The question must then be asked, what percentage of the current SDRC revenues are being inefficiently and/or ineffectively spent in the Granite Belt each and every year as a consequence of the flawed amalgamated model forced upon us? Is it 5% or 10% or much more each year? In my opinion any de-amalgamation costs are likely to be recouped many times over in years to come.

However, it should be stressed that the cost estimates outlined above have been derived solely from the reported costs of past de-amalgamations in Queensland and hence should only be viewed as providing a rough guide to the possible magnitude of costs involved. Much more reliable estimates can be derived if one has access to detailed SDRC financial data. Furthermore, given the experience of Noosa described above, one might reasonably expect that these initial cost predictions could be significantly overstated.

Warwick will benefit as well

Finally, I believe that the residents of the former WSC area should also be very much in favour of de-amalgamation. The costs of de-amalgamation will be paid for in full by the new GBRC. So this process will not cost them anything. Furthermore, they can also expect much better council services in years to come because the new SDRC council will be no longer distracted by the regular challenges they currently face trying to juggle the needs of two very different communities. If I lived in the Warwick area I would also be a strong supporter of de-amalgamation.

Tim Coelli,

Adjunct Professor of Economics

Originally published as OPINION: De-merger perspective