Local Government Reform

Nat O'Connor: A lot of people have heard of 'bord snip nua' and the various recommendations it made for cutting or changing public services. However, the Report of the Local Government Efficiency Review Group, published in July, got a lot less attention. It sets out a range of areas where costs could be reduced, but it also reviews local government services  in more general terms.

For anyone stuck for summer reading, there's 209 pages of detail. But for quick reference, its 106 recommendations are listed from page 171 to page 180.

Interesting items include:

• Ending the situation where towns strike different commercial rates from their counties (Rec. 4), which businesses may welcome;
• Reducing the number of city/county managers from 34 to 24 (Rec. 8), which is in effect a merger of those local authorities at the top managerial level;
• Putting tolls on national roads (Rec. 56), which is madness;
• Full cost-recovery for planning to be sought, especially for major developments (Rec 68), which is logical but could deter higher density development;
• A €10 handling fee for non-online motor tax payments (Rec 75), which further punishes those who don't have Internet access, especially those who already pay the higher tax  rate charged quarterly.

In all, the recommendations are designed to raise €511 million a year.

Different recommendations will no doubt strike different readers. But a couple of general points surface for me.

Firstly, the local government estimated spend in 2010 will be €8.5 billion, including €4.7 billion current. The total efficiency savings amount to 6 per cent of the total, or 10.9 per cent of current spending. I suspect that a lot of the savings are from initiatives that were planned by local authorities anyway (at least, by the more efficient ones), and some suggestions won't be taken up for various reasons. So, that leaves a relatively modest level of cost savings to be squeezed out, on top of the job losses that have gone on across the local government sector over the last few years. And the suggestions do not resolve the long-standing issue of fixing the broken system for funding local government.

Secondly, the report's terms of reference were linked to the state's tax revenue crisis. However, there is more sophisticated analysis that could have been done about the economic value of local government. Is there a difference in terms of business activity between towns of comparable size that do or do not have a town council? If so, is it good for business? There are reasons to imagine that having some kind of local, elected representation could be good for local businesses. This leads on to the question of why some major towns (like Swords) don't have a town council, whereas for historical reasons, very small towns do. If there is an economic value in having representation, the equal representation of all towns, above a set size, might be a more significant reform to consider. And it could have positive economic outcomes in using local government to foster and support enterprise locally.

More Light Touch Regulation? Dublin's Waste Collection Market

Eoin Reeves: In late December 2009 the Irish Times reported that High Court judge (Mr Justice Liam McKechnie) ruled that Dublin’s four local authorities had breached competition law by abusing their dominant position in the household waste collection market in a bid to remove rival private operators. According to the Irish Times:

“Mr Justice Liam McKechnie today quashed a variation to the Dublin region waste management plan whereby only the councils, or contractors appointed by them, could collect household waste”.

A number of interesting issues arise from this particular ruling.

First, according to the Irish Times (December 21st) the judge stated that the actions of the local authorities:

“substantially strengthen the position of the local authorities and substantially influence the structure of the market to the detriment of competition.”

My understanding is that the local authorities sought to exercise more control over the waste collection market by putting contract(s) for waste collection out to competitive tender. The successful bidder would then enjoy monopoly rights to collect waste in accordance with a written contract. This would replace the current system where private operators such as Panda and Greenstar collect waste on the basis of permits (not contracts) issued by the local authorities. These private collectors then compete against each other for customers. Would the change to competitive tendering influence the structure of the market to the detriment of competition as the judge stated?

In my view this argument is very questionable and I have strong reservations about the soundness of the judgement (as reported in the media). It is not clear that the judge has made the distinction between competition in the market and competition for the market.

When the privatisation of refuse collection services came into vogue in the Great Britain in the late 1980s the proponents of privatisation argued that the benefits of competition could be reaped via competitive tendering (competition for the market) and that this was an efficient substitute for competition in the market. In terms of cost efficiency they were proved correct with a host of empirical studies demonstrating that significant costs savings (between 15%-20% on average) were made by moving from direct public provision to private provision after competitive tendering (notwithstanding issues in relation to deterioration of working conditions etc). A key point was that the competitive tension inherent in the tendering process was the key to efficiency gains. These gains were not attributable to privatisation per se. This was evident in cases where local authorities won contracts and also delivered cost savings after competitive tendering.

For a service like refuse collection the argument for competitive tendering is compelling in terms of cost savings. Moreover, the nature of the service is straightforward so writing and enforcing contracts should not be problematic. The contract serves as an instrument for regulating a market where externalities are potentially significant (e.g. illegal dumping in the face of prices set by the private sector) and where market concentration can emerge as dominant private operators squeeze out rivals. The implication of the ‘McKechnie ruling’ is that a market free-for-all is necessary if arrangements are not to be anti-competitive. This results in a light-touch form of regulation compared to contracting out.

It is interesting the note that the Competition Authority has examined this issue in a document published in 2005. Mr. Paul Gorecki, who was then Director of the Monopolies Division in The Competition Authority summarised the findings of the report as follows

“The market for household waste collection is not working well for consumers. Competition law is neither an appropriate or effective remedy in this case. However extensive international experience demonstrates that competitive tendering is the best method of ensuring that household waste collection providers deliver consumers good service at competitive prices.”

Assuming that Dublin’s local authorities were indeed seeking to replace a permit system with competitive tendering there are serious question around the economic reasoning behind the McKechnie ruling.

Some other issues arose from this ruling. These concern the PPP contract for the Poolbeg Incinerator as well as the role of consultants and their influence in shaping public policy. I hope to return to these issues in later posts.

Will some local authorities go bankrupt in 2010?

Nat O'Connor: It has been suggested today that property tax will not be introduced any time soon: “Ministers believe that the introduction of a property tax would prove politically impossible in the current climate”.

It may be political suicide for the Government to introduce property tax, but if they don’t do so, they had better have a Plan B for the funding of local government.

The Tax Commission "envisage that the annual property tax will be an important component in the future financing of local government".

There is a broad range of things that local authorities do, and we have a tendency to take them for granted: drinking water, sewerage, waste collection, road maintenance, social housing, recreation, and much more. Some of their functions, like planning, can have a massive impact on the social and economic fabric of the area.

Since the introduction of the Local Government Fund in 1999, the system of funding for these services has not worked. Every year there is a large gap between what local authorities can raise in revenue and what they need to spend in order to fulfil their roles and functions. An Indecon report in 2005 made the huge gap (estimated to be up to €1.5 billion by 2010) abundantly clear and called for more mechanisms to raise local revenue.

In 2009, the Minister of the Environment, Heritage and Local Government signed off on over €935 million in discretionary General Purpose Grants to local authorities to “meet the gap between the cost to them of providing a reasonable level of day-to-day services and the income they obtain from other sources”. It is important to realise that this discretionary grant is on top of any planned, regular Government grants given to local authorities to carry out various functions (such as the capital for building social housing). In other words, the Minister has been plugging the local funding gap every year since the current funding system was introduced.

It is highly likely that as the state runs out of money, one of the first casualties will be the General Purpose Grant. This means a general degradation of municipal services and local areas. It could also mean increased pressure on commercial rate payers, who continue to be unhappy that they are heavily leaned on by local authorities for revenue, in the absence of other local taxation.

The Government failed to act on local government funding during the boom years and it has only itself to blame if the funding mechanism for local authorities does not work.

In Ireland, all politics really is local politics. So a failure to address local government funding as part of the current crisis will come back to haunt the central government.