SOCIAL SCIENCE WORKING PAPER NO. 8

Transcription

1 Department of Economics Napier University SOCIAL SCIENCE WORKING PAPER NO. 8 COSTING LOCAL GOVERNMENT REFORM Dr Ronald W. McQuaid January 1993 Ronald W. McQuaid ISBN Department of Social Sciences Napier University Sighthill Court Edinburgh EH11 4BN FAX

2 COSTING LOCAL GOVERNMENT REFORM A version has since been published as: R. McQuaid, Costing Local Government Reform, Local Government Studies, Vol. 19, No. 4, pp , I INTRODUCTION Recent government proposals to reform local government into single-tier systems throughout the United Kingdom have assumed that unitary authorities will lead to greater efficiency (DoE, 1991; Welsh Office, 1991; The Scottish Office, 1991; with Northern Ireland already having unitary local authorities). However, existing evidence on whether the introduction of unitary authorities will reduce costs for a given level of services often contradicts this. This paper identifies a number of the problems of prior costs of local government reform and analyses a recent report for The Scottish Office (Touche Ross, 1992) estimating the costs and savings of moving to single-tier authorities. A number of authors have argued that unitary authorities will prove more expensive than the existing two-tier system. Boyne (1992) claims this for Wales, while for Scotland, Midwinter (1992) argues for the retention of the existing two-tier system on the grounds of costs and benefits, efficiency, the presence of economies of scale for some functions, as well as on the basis of democratic effects, attitudes of the public and the lack of feasible alternatives. Skelcher and Leech (1990) estimated that after the abolition of the metropolitan County Councils overall employment rose by around 500 (although with wide differences between job categories) despite claims before abolition that staff levels would fall by up to They also found that many apparent capital savings were transfers or redistributions rather than efficiency savings due to abolition (see also Leech, 1990). 2

3 At a local level a number of authorities have also carried out studies. For instance, Gent (1992) presents evidence from a consultant's report for Nottinghamshire County Council which argues that additional resources would be required if a unitary authority was introduced based upon the City rather than retaining the two-tier system. However, it should be noted that such studies almost invariably favour the retention of the commissioning authority. There are a number of important issues concerning moving to single-tier authorities other than financial costs, such as the Wheatley Commission's four basic objectives of power, effectiveness, local democracy and local involvement. However, continuing pressure on resources means that it is important to be fully aware of the efficiency implications of local government reform in terms of additional costs or savings for the same level of service, or greater services for the same expenditure. Hence, the recent report for The Scottish Office which shows that re-organising local authorities into a small number of single-tier authorities will make savings over both the existing two-tier system and over a system with a larger number of small single-tier authorities is important. Given the significance of its conclusions, it is important to analyze how valid and reliable the findings are. The next section describes the Report and its findings. This is followed by an analysis of some major concerns and possible lessons for other studies of likely costs or savings of moving to unitary authorities, and by a conclusion. II COSTS AND SAVINGS OF LOCAL GOVERNMENT REFORM IN SCOTLAND In June 1991 the government issued a consultation document concerning the reform of local government in Scotland, proposing the setting up of unitary authorities to replace the present two-tier system (The Scottish Office, 1991a). This was followed by a second consultation document, "The Structure of Local Government in Scotland: Shaping the New Councils" (The Scottish Office 1992), which outlined a range possible structures for single-tier local government involving 15, 24, 35 or 51 local authorities, compared to the existing 9 Regional Councils, 53 District Councils, and 3 already single-tier Islands Councils. 3

4 As part of this consultation process a consultancy report "Structure in Local Government: Advice on Financial and Qualitative Appraisal of Options for Change" (Touche Ross, 1992) was commissioned to examine the long-term and transitional costs of reorganisation for different numbers of single-tier authorities. This report shows the likely financial costs and benefits of the proposals for different numbers of new single-tier authorities and indicates the number of new authorities above which local government costs would actually rise compared to the current two-tier system. The report was to assume: that all existing functions should remain with local authorities; that the quantity and quality of services should remain unchanged; and that there should be no changes in management practices (eg from direct service to enabling authorities). Hence the results should allow a comparison between the options and with the existing system of local government on a like-for-like basis. In order to analyze the financial implications of the proposals, the report excluded operational service costs and concentrated upon the changes in non-operational areas, particularly central support and corporate services, management and administration of services and the provision of certain specialist expertise. A survey was carried out of four Regional and twenty-six District Councils and the results grossed up using Joint Staffing Watch data to provide "estimates costs of managing service delivery in the current two-tier system" (para. 3.1) for the whole of Scotland. Overhead costs, such as office accommodation were also added (para. 3.3). Next the report outlined that hypothetical staffing structures relating to the management (but not the operational delivery) of services were produced with structures varying according to population size served. Total employment numbers for these hypothetical structures were set out in Touche Ross (1993). Eight population bands ranging from the lowest band of under 50,000 to the highest of over 750,000 were used. These structures were than employed to estimate the staffing and accommodation costs under the different sizes of proposed new single-tier authorities. The detailed forms of these hypothetical structures are crucial to the results of the report, and are considered below. 4

5 The Report shows that fewer, larger single-tier authorities will lead to the greatest on-going savings. Savings in management and administration costs arising from re-organisation are 6%, 13% and 21% for the 35, 24 and 15 authority options respectively, but ongoing costs actually rise 6% for the proposed 51 authority option. In terms of overall local government expenditure these represent annual savings compared to the present situation of 2.6% in the 'best' case of 15 authorities, and 1.6%, 0.7% and minus 0.8% in the other options. The point at which the ongoing costs of new single-tier authorities would be the same as the current system is around 43 authorities. The results are quite sensitive with even the 35 authority option being more expensive than the current situation given a 10% increase in staffing numbers or salaries. The reasons for the 15 authority option providing the greatest savings are due to the removal of duplication between tiers of local government, and a reduction in overall management staffing and support where Districts have been merged. Under the other options replication of existing Regional Council services results in some counter-balancing cost increases. Some individual services show cost savings while others show cost increases under the different options. The main savings are in central administration and corporate services, financial services, library services and local and strategic planning. Highways and transport, and social work show rising costs due to disaggregation or decentralisation even under the 15 authority option (there are currently 12 Region and Islands Councils carrying out these functions), as do education, trading standards and environmental services under each of the other options. The report goes on to calculate the main transitional costs of reforming local government, particularly the staff related costs (eg early retirement, re-location, redundancy and recruitment costs), planning for change, winding-up existing authorities and information technology. Compared to the current position, total potential savings, after transitional costs, over an initial five year period rise as the size of unitary authorities increases. The net present values of the five year savings are 548.2m for the 15 authority option and 281.7m and 43.1m for the 24 and 35 authority options. The 51 authority option yields higher costs of 389.7m. Even the largest of 5

6 these savings over 5 years is relatively small compared to the annual 1992/3 budget for local authorities of 5,100m excluding loan and leasing charges (Cipfa, 1992). 6

7 III ANALYSIS OF THE PROJECTED COSTS AND SAVINGS Analysis of the Report raises a number of issues concerning its methodology and data. These issues include: sensitivity to a limited number of variables; reliability of data; treatment of economies of scale; staffing inconsistency; and analysis of total costs. These comments are based upon information contained within the Report itself and in associated data (Touche Ross, 1992, 1993). There are also some further concerns about issues assumed away by the Report such as: the impact of changes on operational services, which may to be large and dwarf some of the savings in management and administration costs; and costs for the joint ventures that are likely to arise in many cases (see Hayton, 1993). III.1 Concentration of savings on two services. The first issue is that, under each of the four options, only two services - Planning and Economic Development and Central Administration and Corporate Services - together account for between 75% and 82% of gross savings under the various options, yet they make up only 31% of non-operational costs and around 5% of total local authority expenditure. Therefore the results are extremely sensitive to assumptions about and data for these two functions. 7

8 III.2 Accuracy of estimates. The second issue relates to the accuracy of the estimates of existing management and administration costs. The Report identifies such staff by categorising them according to a simple salary scale which ignores the actual function of the jobs performed. Hence those above point 29 on the APT & C salary scale are assumed to be non-operational middle and senior managers, and those on scales 1-28 are non-operational support staff. Departments with a high percentage of professionally qualified staff are likely to have many staff on these scales primarily carrying out operational rather than management duties. Under the 15 authority option, only 2463 management and administration staff are required for Planning and Economic Development, a reduction of 53% of current staff. While there will be reduced need for consultation between the two-tiers this is not likely to lead to such significant savings as consultation will still be required with other departments (eg highways), and if joint strategic boards are introduced then the need for consultation could actually rise. If the savings are due to streamling the management of the services, then why could this not be done as effectively under the two-tier system? It is difficult to believe that such savings could be made and not affect operational services. III.3 Economies of Scale. Third, the Report assumes that there will be continuous economies of scale in the new unitary authorities for all services i.e. fewer management and administration staff per head of population as authorities increase in size (see McQuaid, 1993). This gives lower costs per capita, and therefore lower costs for local government as a whole, as the average size of authority rises. Table 1 (columns i and iv) shows the Report's figures for employment per capita for the proposed unitary authorities for the two services mentioned above. However, evidence from elsewhere indicates that both operational and non-operational aspects of many services exhibit a lack of economies of scale or even diseconomies of scale in some after certain population thresholds (see for instance Bennett, 1980; Stodard, 1981; Page and Midwinter, 1981). 8

9 Also, evidence from the Report's own survey of existing authorities (Touche Ross, 1993) indicates that there is no clear link between increasing size and higher or lower management and administration staff numbers per 1,000 population in many services, such as for Planning and Economic Development (column ii) in existing District Councils. Here, the smallest Councils have the lowest figures (0.44 PED staff per 1,000 population) and the largest Council has the highest staff per capita figure (1.34), indicating diseconomies of scale and perhaps reflecting the range and type of problems faced in cities compared to rural areas. For Regional Councils staff per 1,000 of population fall from 0.57 to 0.35 as authorities increase to the 300, ,000 size band (indicating economies of scale), but then show diseconomies of scale as the figure rises to 0.42 for Regions between 500,000 and 750,000 people (column iii). For Central Administration and Corporate Services there is similar ambiguous evidence concerning economies of scale (column v and vi) especially for smaller Regional and for District Councils. These assumptions about economies of scale lead to a systematic bias in the Report towards favouring the larger unitary authorities for all services. It is therefore important to identify if this is the case, and if so, at what level do economies or diseconomies of scale occur for different services and structures. III.4 Inconsistencies in Staffing Levels. A fourth issue concerns the internal consistency of figures for the Report's management structures for the proposed unitary authorities. The Report assumes that there would be no change in management practices, and that the authorities will have more functions (as all services will remain with the new unitary authorities and so they will have both District and Regional functions). Taking Planning and Economic Development and Central Administation as examples, the total figures for management and administration staff for Planning and Economic Development are lower for the new unitary authorities than for existing Districts of the same size bands, in all except the two smallest size bands (table 2). For instance in the 200<300,000 band new unitary authorities are expected to need 130 Planning staff, while there are 239 existing staff covering only District functions. Similarly, for Central 9

10 Administration and Corporate Services, the single-tier authority figures are lower than those for existing Districts in four of the size bands. Comparable results occur for most other services (McQuaid, 1993). For instance, in the case of Housing, which is currently solely a District Council function, a unitary housing authority of 200<300,000 is expected by the Report to require under 56% of the staff of an existing authority of that size, or in the case of an authority 500<750,000 only 36% of staff. The Report assumed no change in management practices, such as an increasing role of local government as an enabler rather than direct provider of services. In the future it is possible that employment in local authority functions may fall due to such changes, for example to increasing use of contractors. These changes would not necessarily be different under unitary authorities compared to two-tier authorities. However, it will be important for future studies to differentiate reductions in staffing levels due to these different factors. These problems also highlight the absence of detail on the proposed management structures for the new unitary authorities in the Report. As indicated above, the proposed new management and administration structures would appear to underestimate the staff needed (given the Report's assumptions), perhaps because the base figures for existing staff were exaggerated and so scope for savings limited, or because the model structures are unrealistic. The figures for the model structures and their assumptions largely determine the level of savings or additional costs of reforming local government, so it is important that they should be made explicit. III.5 Total Costs of Re-organisation. Finally, the Report should accurately compare the full costs of the current system with all costs and savings of the new system, including the costs of new authorities, any additional new bodies and extra expenditure for existing bodies, together with the transition costs. It is essential that the full costs of the new system be compared with the costs if there is no reform, in order to make a meaningful conclusion on the costs or savings of the unitary system. The study does not appear to explicitly take full account of all the possible costs or savings and, according to its 10

11 own assumptions omits for example possible savings on the cost of democracy due to there being fewer Councillors, or Information Technology savings after three years. Out of 13 services all but four would require some form of joint delivery body for some of the authorities under the various options. The additional costs of these joint bodies needs to be explicitly set out as this is a transfer of public sector costs. In addition to loss of accountability and confusion as to who is responsible there may be less ability and incentive for any one elected local authority to control the costs of these joint boards. It is an unproven expectation that the benefits of joint boards in terms of reaping economies of scale and specialisation will compensate for the lack of ability to directly control expenditure. It is important that all these costs be explicitly set out. 11

12 IV CONCLUSION This paper considered some of the issues concerned with prior costing of local government reform and in particular examined a recent Report for the government seeking to identify the costs and savings resulting from the proposed creation of single-tier local authorities in Scotland. The Report's results are important in influencing the way reform of local government will go ahead, and in arguing that maximum savings compared to the current two-tier system will result from having a smaller number of large unitary authorities. Maximum total savings, of just over 2% of the annual local government budget, are claimed to be achieved in the 15 authority case. However, the current paper raises a number of concerns relating to the data, methodology and possible systematic biases of the report and hence its conclusions on the likely cost implications of the reform of local government. The paper focused primarily upon the two functions expected to generate three-quarters of identified savings, Planning and Economic Development and Central Administration due to their importance in providing savings, but similar concerns were apply to other services. A number of methodological problems were found with the study and the data used, both concerning these and other functions. In addition certain issues concerning the model used were analyzed and internal inconsistencies identified. The Report's assumption that operational costs would not change with the size of new authorities was also questioned. Overall the savings from re-organisation are likely to have been exaggerated, although in some cases there may be a partly counter-balancing under-estimation in savings. It is therefore essential that further independent work is carried out to determine the likely costs and benefits of the various proposals for local government reform. Otherwise reforms could be put in progress which significantly increased the costs of local government with no corresponding increase in output. Finally, this paper has not been able to consider extremely important issues such as the implications for democracy, accountability, the provision of individual services, the relationship between Central and local government or increasingly Europe and local government have not been considered. There are also a number of related issues that will 12

13 influence future local government costs, such as compulsory competitive tendering and the move towards enabling authorities, where services are bought-in rather than directly provided, may affect the relative costs of single- or two-tier systems. 13

14 REFERENCES R.J. Bennett, The Geography of Public Finance, London, Methuen, G.A. Boyne, The Reform of Local Government Structure in Wales: A Critique of the Case for Unitary Authorities, Public Money and Management, Vol.12, 1992, pp CIPFA, Scottish Branch - Rating Review Estimate of Income and Expenditure , Summary Volume, Edinburgh, Chartered Institute of Public Finance and Accountancy, June COSLA, Joint Staffing Watch -June 1992 Return - Scotland, Edinburgh: Convention of Scottish Local Authorities and Scottish Office, DOE, Local Government Review. The Structure of Local Authorities in England, London, Department of Environment, R. Gent, The Future Structure of Local Government - the Case of Nottingham, Public Money and Management, Vol.12, 1992, pp K. Hayton, Two into One Won't Go - an analysis of the proposals for the Reform of Scottish Local Government, Local Government Policy Making, Vol. 19, No. 4, pp S. Leech, Accountability in the post-abolition metropolitan government system, Local Government Studies, Vol.16, 1990, pp R.W. McQuaid, Local Authorities and Economic Development in Scotland, Edinburgh, Convention of Scottish Local Authorities, A. Midwinter, The Review of Local Government in Scotland - A Critical Perspective, Local Government Studies, Vol.18, 1992, pp The Scottish Office, The Structure of Local Government in Scotland: the Case for Change, Edinburgh, HMSO, 1991a. The Scottish Office, Scottish Abstract of Statistics 1991, Edinburgh, HMSO, 1991b. The Scottish Office, The Structure of Local Government in Scotland, Shaping the New Council. A Consultation Paper, Edinburgh, HMSO, October C. Skelcher and S. Leech, Resource choice and the abolition Process, Local Government Studies, Vol.16, 1990, pp Stodard, Report of the Committee of Inquiry into Local Government in Scotland, Cmnd 8115, Edinburgh, HMSO, Touche Ross, Structure of Local Government in Scotland:Advice on Financial and Qualitative Appraisal, Edinburgh, The Scottish Office Central Research Unit, October Touche Ross, Additional Information Supplied to the Working Group on Local Government Finance, Edinburgh, The Scottish Office Central Research Unit, Welsh Office, The Structure of Local Government in Wales, Cardiff, Welsh Office,

15 TABLE 1: Average number of management and administrative staff per 1,000 inhabitants by population size band. Population Planning & Econ. Dev. Central Administration ('000) Model District Regions Model District Regions i ii iii iv v vi 0< < < < < < < > Notes:- Model - Figures for unitary authorities in Touche Ross (1992). District - Actual figures for the existing Districts. Regions - Actual figures for the existing Regions. Island Councils are excluded as they are currently single-tier. The figures are based upon the mid-point for each population band. In the case of the 750,000> band, the demoninator is taken to be 750, %, i.e. 937,500. Calculated from: Touche Ross (1993).

16 TABLE 2: Average number of management and administrative staff per authority by population size band. Population Planning & Econ. Dev. Central Administration ('000) Model District Regions Model District Regions 0< < < < < < < > Notes:- Model - Figures for unitary authorities in Touche Ross (1992). District - Actual figures for the existing Districts. Regions - Actual figures for the existing Regions. Source: Touche Ross (1993). 16