Left-wing blog The Standard veered beyond its usual polemic last week with a guest post that painstakingly laid out how Auckland Council had spent $1.24 billion on a new IT system with little to show for it so far.
The piece, written in response to Bernard Orsman’s scoop in the New Zealand Herald, was notable for its familiarity with major IT project processes, and how far Auckland Council had strayed from industry best practice.
The Standard’s piece laid much of the blame at the feet of businessman Mark Ford, who was executive chairman of the Auckland Transition Authority from 2009-10. This was the body tasked with merging Auckland’s eight councils into a super city.
It also made the decision to build a greenfields IT system, instead of using existing assets. The National-led government also copped a lot of the blame in the blog post since it was responsible for appointing the transitional body.
It is hard to tell how credible this account is, given it was written under a pseudonym. Auckland Council has been tight-lipped on the issue. Mr Ford also cannot put his version of events forward as he died in 2014, so it is unlikely that the public will ever know just who is right or what exactly transpired.
Should we really be surprised at the budget blowout? A plethora of research into municipal mergers shows they seldom – if ever – deliver the cost savings and efficiencies they promise. In fact, amalgamations are more often associated with cost blowouts than not.
Research into the municipal mergers that took place in Montréal and Toronto in the late 1990s and early 2000s plainly shows the costs of running both cities rose after the merger process.
In the case of the former, it was calculated that it cost almost $C500 million more to run the merged city of Montreal each year than it did when it operated as the CBD plus 28 independent municipalities. This excludes the one-off costs related to the merger. Empirical studies into Australian local government mergers also found little evidence of efficiency gains from amalgamation.
This may seem like an absurdity to those readers working in the private sector, particularly if they hold an MBA.
It seems all but impossible that slashing the number of local authorities and reducing headcount does not lead to streamlined decision making, economies of scale and lower costs. And yet the empirical evidence is clear.
One-off costs
There are several reasons for this. The first is the one-off costs incurred by unifying all the systems and processes that were previously used by the separate authorities. Auckland’s IT project is a case in point. Those who read the business pages will note that companies regularly get these kinds of projects wrong and the bigger the project, the bigger the risk. There is no sound reason to expect Auckland Council to be any more capable of managing this process than the private sector.
Furthermore, using an off-the-shelf application is no guarantee of success either. Only this week it was reported the Serious Fraud Office had cancelled its contract with Wynyard a year early because the company’s product could not meet the watchdog’s requirements.
Rising staff numbers
Then there are staff numbers and wage bills. Amalgamations are almost always sold on the promise of reducing staff numbers. Yet the Montréal and Toronto case studies show the opposite. Headcounts in both cities increased by thousands. Our very own super city seems to be headed in the same direction. Statistics New Zealand data shows the council’s wage bill rose from $263 million in June 2011 to $462 million as of June 2014, an increase of 75%. Whether this is because of democratic choice or system design is still being debated.
More troubling from an operating expenditure perspective is cost harmonisation. When local entities merge the rule of thumb is that costs, particularly wages, equalise upward. So that where a cleaner in a suburban municipality used to earn 20% less than their CBD counterpart, perhaps reflecting the nature of the work, after the merger the unitary authority will pay all cleaners the same rate. This applies to managers, administrators, engineers and so on. It is easy to see how costs escalate.
No yardsticks
Finally, unifying groups of municipalities into a single entity eliminates yardstick competition. This is the process where taxpayers hold municipalities accountable for any undue increases in the costs of service provision by comparing their bills to those of a neighbouring jurisdiction.
This does not exist with unitary authorities because they are monopolies. Under the old Auckland structure, irate residents on the North Shore could move to Waitakere if they were annoyed enough with their local authority.
Where do they move to now if they are fed up with Auckland Council? The nearest urban centre is Hamilton, and with all due respect, it does not offer nearly the same agglomeration advantages as Auckland.
The obvious weakness with a local governance model that consists of multiple authorities is service provision that extends beyond jurisdictional boundaries. This also applies where there are high capital costs, or where these services need to be provided at scale in order to be efficient. Good examples of this are transport infrastructure and potable and wastewater networks. But you get around this problem by handing these tasks to regional bodies, like Auckland Transport, Watercare or indeed regional councils.
From an economic perspective, if you are looking for costs savings at a metro level, mergers are not the way to do it. Not that this will deter politicians from trying to increase the size of their fiefdoms. The Ontario and Quebec provincial governments were advised by numerous economists and mountains of evidence not to pursue the Toronto and Montréal mergers. It was ignored.
Judging by an article in the Dominion Post this week, in which Porirua City Council mayor Nick Leggett downplayed the costs of a proposed merger with Wellington City Council, politicians here seem as determined to have their way. Depressing stuff.