The Australian Economic Review, vol. 46, no. 3, pp.
300–11
Local Government Efficiency: Evidence from Western Australia
James Fogarty and Amin Mugera*
Abstract
The state government of Western Australia has
suggested there are economies of scale in local
government service delivery and that council
amalgamations would allow substantial effi-
ciencies to be realised. In this article, the Data
Envelopment Analysis method is used to
measure efficiency at 98 local councils in
Western Australia in 2009 and 2010. Although
many councils were found to be operating
under increasing returns to scale, many others
were found to be operating under decreasing
returns to scale. This suggests there is room for
either scaling down or expanding for some
local councils to achieve optimal scale.
* School of Agricultural and Resource Economics, The
University of Western Australia, Western Australia 6009
Australia. Corresponding author: Fogarty, email <james.
fogarty@uwa.edu.au>.
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1. Introduction
John Castrilli, Minister for Local Government,
Heritage, Citizenship and Multicultural Inter-
ests in Western Australia, has suggested that
local government service delivery is subject to
economies of scale and that council amalga-
mations would allow significant benefits to be
realised (Castrilli 2009). Although this is the
position of the Western Australian state
government and may reflect a view held by
many in the community, a literature review has
failed to identify any study that formally tests
for economies of scale in service delivery across
Western Australian local councils. Considering
the local government sector in Australia more
generally, Byrnes and Dollery (2002) argue that,
prior to 2002, there had been no satisfactory
study into economies of scale in local govern-
ment service provision. A review of the recent
literature suggests this is still the case.
Regarding the benefits of council amalga-
mations, the evidence that is available does not
generally support the view that amalgamations
provide substantial cost savings. For example,
in summarising the outcomes of local council
amalgamations in the 1990s, Allan (2003)
reports that most of the cost savings from the
Victorian amalgamation program came from
the introduction of competitive tendering rather
than amalgamations; that the cost savings were
very minor following amalgamations in South
Australia; and that the evidence of cost savings
following the Tasmanian amalgamation pro-
gram is mixed. Allan (2003, p. 76) goes on to
argue that: ‘Almost all the international
research on whether size matters in local
government comes to the same conclusion—
bigger councils are less economical and less
locally responsive’. This suggests that there
may not be economies of scale benefits from
amalgamations of local councils in Western
Published by Wiley Publishing Asia Pty Ltd
 Fogarty and Mugera: Local Government Efficiency
Australia. The purpose of this study is to
contribute to the debate on whether economies
of scale can be achieved by amalgamation of
local councils in Western Australia.
2. Local Government in Western Australia
Over the past 50 years, the roles and responsi-
bilities of local councils have evolved substan-
tially. Submissions to the 2001 Commonwealth
Grants Commission review of the Local
Government (Financial Assistance) Act 1995
(Cwlth) identified the reasons for the expansion
of local council service provision as: (i) higher
levels of government devolving responsibility
to local councils; (ii) higher levels of govern-
ment defining, through legislation or other
means, higher service standards; (iii) increased
community expectations; and (iv) local policy
choices to increase service provision (Common-
wealth Grants Commission 2001). In Western
Australia, a significant change that has allowed
local councils to take on a greater range of
activities was the replacement of the Local
Government Act 1960 (WA) with the Local
Government Act 1995 (WA), which, in Section
3.1, explicitly states that a liberal approach is to
be taken regarding the range of functions that a
local council can undertake to ensure the ‘good
government of persons in its district’.
That local councils have taken on an
increased range of functions is not in and of
itself a problem. The subsidiary principle says
that services should be provided by the lowest
level of government that can effectively deliver
the service. As such, we should expect local
councils to deliver a wide range of services. A
potential problem only arises when there is a
mismatch between the revenue-raising capacity
of local councils and their service delivery
responsibilities. The House of Representatives
Standing Committee on Economics, Finance
and Public Administration (2003) considered
the issue of local council fiscal capacity and the
extent to which higher levels of government
have been able to shift costs to the local
government sector without providing adequate
financial compensation. The inquiry was
unable to determine the extent of cost shifting,
but did find that cost shifting had taken place.
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In Western Australia, nominal local govern-
ment operating expenditure has grown at
around 8 per cent per annum since 2001 and
reached $2.9 billion in 2010–11 (ABS 2012). In
addition to their own-source revenue, councils
receive a general purpose grant and a road
funding grant. The road funding grant is based
on an asset-preservation model and the general
purpose grant reflects horizontal equalisation
principles. The actual annual grant amounts are
calculated by the Western Australian Local
Government Grants Commission. Debt levels
in the sector remain modest, and in 2011, total
local government debt in Western Australia
was $455 million, against total assets of $20.1
billion (ABS 2012). Although local councils do
not, on average, have substantial debt levels,
councils have not been investing sufficiently in
asset maintenance. For example, analysis of
financial statements found average local coun-
cil spending on non-financial assets to be only
75 per cent of the level required to maintain
assets at their current condition (Access
Economics 2006).
To gain a more detailed understanding of the
financial health and organisational capacity of
local councils, in 2009 the state government
surveyed all councils in Western Australia. The
information that was sought in the survey
related to: strategic, financial and infrastructure
planning practices; governance, representation
and community advocacy activities; under-
standing of demographic issues; and organisa-
tional capacity. Some of the more striking
findings of the survey were that: 82 per cent of
councils undertook little or no financial
planning to identify future asset maintenance
and renewal gaps; 81 per cent of councils
undertook little or no asset maintenance and
renewal planning; 77 per cent of councils
undertook little or no financial management
planning; and 36 per cent of councils undertook
little or no strategic planning (Department of
Local Government 2010).
Despite the lack of compelling empirical
evidence suggesting council amalgamations
provide substantial benefits, over the past
20 years there have been notable reductions
in the number of local councils in all states other
than Western Australia. As can be seen from
302 The Australian Economic Review September 2013

Table 1 Local Government Comparison across Australian States: 1991 and 2012

1991 2012 Changes

Average Average Average Average Average Average

Council population size Council population size Council population size
State (N) (N) (km2) (N) (N) (km2) (N) (N) (%)

New South Wales 176 33,516 4,549 152 47,843 5,267 –24 14,328 16
Queensland 134 22,097 12,915 73 63,176 23,708 –61 41,080 84
South Australia 122 11,855 8,061 74 22,303 13,290 –48 10,448 65
Tasmania 46 10,148 1,487 29 16,429 2,359 –17 6,281 59
Victoria 210 21,049 1,083 79 68,958 2,879 –131 47,909 166
Western Australiaa 138 11,856 18,332 138 16,791 18,332 0 4,935 –

Note: (a) The 2012 values for Western Australia exclude the Cocos (Keeling) Islands and Christmas Island as they are external
territories.
Sources: Population and land mass details are available from <http://www.abs.gov.au>; current local council numbers are
available from the respective state government department websites; historical local council numbers are available from WA
Local Government Association (2008).

Table 1, since 1991, the number of local
councils has been reduced by: 14 per cent in
New South Wales (NSW); 46 per cent in
Queensland; 39 per cent in South Australia; 37
per cent in Tasmania; and 62 per cent in
Victoria. During this same period, there has
been a limited number of amalgamations in
Western Australia, but this reduction in council
numbers has been completely offset by the
creation of new councils.
3. Local Council Efficiency Literature
The efficiency of a production unit is defined in
terms of a comparison between observed and
optimal values of its outputs and inputs. In
economic studies of organisational perfor-
mance, efficiency measures, such as technical
efficiency, allocative efficiency, cost efficiency,
dynamic efficiency and scale efficiency, are
often used to benchmark the performance of a
production unit relative to other units in the
same type of business. Technical efficiency can
be defined as the ability of a firm to produce the
maximum possible output within an available
set of inputs under a given technology. It is the
ratio of the observed output to optimal output
levels for a firm relative to other firms in its
cluster. Allocative efficiency means that re-
sources are allocated to producing the items
most valued by society. This means that the
specific balance between the use of different
input factors, such as labour and capital, is
optimal, given factor prices. Cost efficiency is a
measure that combines allocative and technical
efficiency. Dynamic efficiency means that
resources are used efficiently through time.
Scale efficiency considers whether an organi-
sation is operating at the correct scale, or is
subject to increasing or decreasing returns to
scale.
To obtain insights into local government
efficiency and scale effects, it is possible to use
either parametric or non-parametric ap-
proaches. The main non-parametric approach
relies on the mathematical programming tech-
nique called Data Envelopment Analysis
(DEA). The main parametric approach is the
Stochastic Frontier (SF) approach. Both meth-
ods, as they apply to measuring local govern-
ment efficiency, are explained in Worthington
and Dollery (2000a).
Much of the local government efficiency
literature concerns countries other than
Australia, and as council functions vary widely
from country to country, the relevance of non-
Australian examples is limited. As such, the
literature review is restricted to Australian
examples. All of the DEA or SF studies
identified consider council efficiency in
NSW, with five studies considering efficiency
across specific service areas and one study
considering overall council efficiency. The
studies that consider a single service area are

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 Fogarty and Mugera: Local Government Efficiency
relevant, in that they provide insights regarding
the type of inputs and outputs to consider and
the extent of scale inefficiency across individu-
al service areas, but these studies are not as
relevant as Worthington (2000), which consid-
ers overall council efficiency. The single
service area studies all rely on the DEA method
to obtain efficiency measures and are summar-
ised in Table 2. Incorrect scale was found to be
a significant source of inefficiency in the
provision of library services, but across
planning and regulatory services, waste ser-
vices and water services, incorrect scale was
found to be only a relatively minor contributor
to inefficiency. From these studies, it is
therefore unclear whether scale effects are a
significant source of inefficiency at the whole of
council level.
In Worthington (2000), overall council
efficiency is measured by using both the
DEA method and the SF method. The DEA
model that was used allowed for variable
returns to scale (VRS), and as such, technical
efficiency, allocative efficiency and total cost
efficiency measures were calculated. A translog
specification was used for the SF model. Using
the DEA method, the average cost efficiency
score for NSW councils was 0.699, the average
allocative efficiency score was 0.821 and the
average technical efficiency score was 0.853.
As a VRS model was specified, the results
remove the impact of scale effects and no
information on scale as a source of inefficiency
was reported. Using the SF approach, the mean
cost efficiency score for councils was 0.868.
Both the DEA and SF approaches can be
viewed as robust and comprehensive frame-
works for measuring local government effi-
ciency. There are, however, complementary
methods of analysis that can provide insights
into the role of scale effects in local government
service delivery. For example, it is possible to
analyse the correlation between the population
of councils and the per head of population cost
of service delivery. With such an approach, it is
only possible to consider the efficiency of
individual council functions in isolation, as
opposed to the efficiency of the local council as
a whole, but partial analysis of this kind is still
valuable. Using this approach and data for
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South Australian councils for the 1985 financial
year, Easton and Thomson (1987) find evidence
of economies of scale in administration
functions, roads and overhead expenditures,
but no evidence of economies of scale for waste
services, drainage or recreation and culture
services. A similar type of partial analysis is
used by Haward and Zwart (2000) to measure
the impact of the 1993 amalgamation program
in Tasmania. Specifically, Haward and Zwart
calculate the ratio of administrative costs to
current payments for four case study examples
and in only two cases do they find evidence of a
substantial reduction in the ratio of administra-
tive costs to current payments following
amalgamation.
In summary, most of the empirical evidence
regarding the efficiency of local government in
Australia relates to data collected in the 1990s
or earlier and most relates to NSW. There is no
direct evidence on the role of scale effects at the
overall council level and only limited and quite
dated evidence that scale effects are important
in some local government service delivery
areas.
4. Methods and Results
To obtain measures of efficiency, the DEA
method first uses the sample data to construct a
piece-wise linear best-practice production fron-
tier. The efficiency of a decision-making unit is
then measured relative to that frontier. The
method can accommodate multiple inputs and
outputs in the linear program and efficiency
measures are bounded by zero and one. The
original DEA model was proposed by Charnes,
Cooper and Rhodes (1978) and assumed
constant returns to scale (CRS). Later, Banker,
Charnes and Cooper (1984) introduced a DEA
model under VRS.
The traditional DEA method has been
criticised for lacking a solid statistical founda-
tion and being very sensitive to outliers.
Because of this, some productivity analysts
prefer parametric approaches to measuring
efficiency such as the SF method. However,
the bootstrapping DEA method that was
introduced by Simar and Wilson (1998,
2000) provides a statistically sound solution
 Table 2 Local Government Specific Service Data Envelopment Analysis Studies for Australian Local Councils
304

Sample and
No. Author(s) Function data year Inputs and outputsa Efficiency scoresb Main findings

1 Worthington (1999) Library services 168 NSW Inputs: Gross library expenditure, population, area, NESB, CRSc: 0.28 (9.5) Scale is the main source of inefficiency and a
councils socio-economic index VRSd: 0.71 (47.6) population of 20,000–30,000 is optimal

°
(1993) Output: No. of library issues Scalee: 0.42 (10.1) for library services
2 Worthington and Planning and 173 NSW Inputs: Planning expenditure, legal expenditure, no. of full- CRS: 0.79 (53.8) Scale inefficiency in the planning and regulatory

C 2013
Dollery (2000b) regulatory councils time equivalent staff, population growth, development VRS: 0.83 (64.2) function is not a widespread or significant
services (1993) activity index, heritage and environment index, proportion Scale: 0.94 (56.1) problem; the main source of inefficiency for
of non-residential properties, population distribution, NESB urban councils is excessive legal expenses and
Outputs: No. of building applications and no. of development the main source of inefficiency for rural
applications determined councils is excessive staff numbers
3 Worthington and Domestic waste 103 NSW Inputs: Waste collection expenditure, no. of properties served, CRS: 0.56 (26.2) Modelling efficiency scores using a logit
Dollery (2001) services councils average occupancy rate, population density, population VRS: 0.67 (40.8) framework indicates urban developed and rural
(1993) distribution, waste disposal cost index Scale: 0.85 (82.5) agricultural councils as least likely to be
Outputs: Total garbage and recyclables collected, implied efficient; for urban councils, a key source of
recycling rate inefficiency relates to the inability to
effectively use large machinery
4 Worthington and Planning and 173 NSW Inputs: Planning expenditure, legal expenditure, no. of full- VRS: 0.94–0.53 Efficiency scores vary depending on how
Dollery (2002) regulatory councils time equivalent staff, population growth, development (77.5–19.1) contextual information is incorporated into the
services (1993) activity index, heritage and environment index, proportion Scale: 0.95–0.63 Data Envelopment Analysis model
of non-residential properties, population distribution, NESB (52.6–6.4)
Outputs: No. of building applications and development
applications determined and approved
5 Woodbury and Water services 73 NSW Inputs: Cost for management, maintenance and operations, CRS: 0.74 (20.5) In water service provision, 47% of councils face
Dollery (2004) councils energy and chemicals and capital replacement VRS: 0.80 (30.1) decreasing returns to scale and 27% face
(2000) Outputs: No. of assessments, water consumption, water Scale: 0.92 (20.5) increasing returns to scale, while the total
The Australian Economic Review

quality index, service index annual factor productivity growth is about

1.15%

Notes: (a) NESB denotes non-English-speaking background population share.

(b) Efficiency scores are mean values, with the percentage of efficient local councils in parentheses.
(c) CRS denotes the constant returns to scale, or the overall technical efficiency score.
(d) VRS denotes the variable returns to scale, or the pure technical efficiency score.
(e) Scale denotes the scale efficiency score, which is found as CRS/VRS.
September 2013

The University of Melbourne, Melbourne Institute of Applied Economic and Social Research
 Fogarty and Mugera: Local Government Efficiency
to the criticism of the traditional DEA method
and allows estimation of bias-corrected effi-
ciency scores, variation and confidence inter-
vals (Mugera and Langemeier 2011).
For our analysis, we estimate traditional and
bias-corrected efficiency scores using the DEA
method, assuming both VRS and CRS technol-
ogies. This approach enables technical efficien-
cy to be decomposed into ‘pure technical’ and
‘scale’ efficiencies. Specifically, any difference
in the estimated technical efficiency score under
the two technologies indicates scale inefficien-
cies at local councils. The standard form of the
DEA linear program used is specified in detail
in numerous textbooks and journals. Details of
the bootstrapping DEA method are also well
documented (Simar and Wilson 1998, 2000).
As such, the technical aspects of the methods
used are not repeated. It is simply noted that an
input-orientated DEA model was specified and
that efficiency scores and bias-corrected effi-
ciency scores were obtained by using the FEAR
package in R.
For this study, the original intention was to
measure council efficiency using the informa-
tion submitted by councils to the state govern-
ment as part of annual reporting processes.
Unfortunately, the data submitted by councils
are not accurate. As such, the data collection
process involved checking each council’s
website, and where possible, downloading
copies of the annual financial statements. The
values required for the study were then
transcribed directly from the financial state-
ments to an MS Excel workbook. Using this
process, it was possible to obtain data for 98 of
the 138 Western Australian local councils for
the financial years ending June 2009 and
June 2010. The sample councils represent 88
per cent of the Western Australian population.
Relative to the study sample, there are
notable differences in the population and size
of the councils that were excluded due to a lack
of data. For example, in Western Australia,
there are 12 local councils that are greater than
10,000 km2 in size, but only two of these
councils are in the sample. Furthermore, of the
36 councils in Western Australia with a
population of less than 1,000, only 18 are in
the sample. The high proportion of local
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305
councils with either a very small population
base or a very large geographical footprint
excluded from the sample means that the study
findings must be interpreted with caution.
The focus of the study is to measure
efficiency over the entire range of local
government activities, which in Western
Australia includes: (i) library services; (ii)
environmental services; (iii) recreational ser-
vices; (iv) community services; (v) planning
and regulatory services; (vi) waste management
and recycling services; and (vii) road mainte-
nance services. The output proxy that is used
for services (i)–(iv) is the population of the local
council area; the output proxy that is used for
services (v) and (vi) is the number of properties
in the local council area; and the output proxies
that are used for service (vii) are the length of
sealed and unsealed roads in kilometres. These
output proxies are broadly consistent with the
approach taken in Worthington (2000) and
Balaguer-Coll, Prior and Tortosa-Ausina
(2007), but it should nevertheless be emphas-
ised that these measures are only proxies for the
true outputs of local government. It is also
worth noting that assuming the quality of
services across councils is constant is a strong
assumption that further suggests a cautious
approach to interpreting results.
The inputs selected were employee costs,
physical expenses and financial expenses,
where: employee costs are total employee
expenses, including superannuation liability;
physical expenses consist of materials pur-
chased, contract expenses, utility expenses,
insurance costs and any costs grouped under the
heading ‘other expenses’ in the financial
statements; and financial expenses relate to
interest expenses. The selection of inputs is
consistent with the approach taken in the
existing literature and reflects the way financial
information is reported by councils.
A summary of the efficiency score informa-
tion from the traditional method is provided in
Table 3. Across 2009 and 2010, the average
technical efficiency score for the 98 councils
was around 40 per cent under CRS and around
60 per cent under VRS. In both years, the global
technical efficiency frontier under CRS is
defined by relatively few councils: 10 in 2009
306 The Australian Economic Review September 2013

Table 3 Summary Efficiency Information: Traditional Data Envelopment Analysis Measures

2009 2010
a b
CRS efficiency VRS efficiency Scale efficiency CRS efficiency VRS efficiency Scale efficiency

Mean 0.406 0.583 0.723 0.400 0.616 0.702

Maximum 1 1 1 1 1 1
Minimum 0.065 0.112 0.156 0.057 0.100 0.158
Standard deviation 0.289 0.334 0.246 0.301 0.357 0.277
Distribution (%)
<40 62 44 11 65 40 18
41–50 5 5 9 10 6 13
51–60 7 8 13 2 4 5
61–70 6 3 9 2 1 6
71–80 3 2 6 1 4 8
81–90 3 4 16 3 3 11
91–99 2 1 24 1 1 23
100 10 31 10 14 39 14

Notes: (a) CRS denotes the constant returns to scale, or the overall technical efficiency score.
(b) VRS denotes the variable returns to scale, or pure technical efficiency score.

and 14 in 2010. Under VRS, there were 31
efficient councils in 2009 and 39 efficient
councils in 2010.
A striking feature of the result is the way
councils cluster as either relatively efficient or
relatively inefficient. This finding is illustrated
in Figures 1 and 2. Figure 1 is a density plot of
the traditional technical efficiency scores and
the bias-corrected efficiency scores under the
VRS technology for the 2 years and the bimodal
distribution can be seen clearly. Figure 2 plots
the individual bias-corrected VRS efficiency
scores and the 95 per cent confidence interval
around each efficiency score. The data are
ordered from the most efficient council to the
least efficient council, and again, the relatively
rapid transition from a group of efficient
councils to a group of relatively inefficient
councils can be seen clearly.
There were substantial changes in the
efficiency scores of some councils between
the 2 years. With data for 2 years, it is possible
to look for factors that may have impacted some
councils in 1 year but not the other. In some
instances, it was possible to identify the state
government’s Royalties for Regions Program
as the likely source of the change in the
efficiency score. The Royalties for Regions

Figure 1 Density Plot of Local Council Variable Returns to Scale Efficiency Scores

2009 scores 2009 scores

1.8 2010 scores 1.8 2010 scores

1.5 1.5

1.2 1.2
Density

Density

0.9 0.9

0.6 0.6

0.3 0.3

0.0 0.0
0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8 1.0
Raw efficiency scores Bias-corrected efficiency scores

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 Fogarty and Mugera: Local Government Efficiency
Figure 2 Bias-Corrected Variable Returns to Scale Efficiency Scores
1.2
Efficiency score
1.0
0.8
0.6
0.4
0.2
0.0
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97
Program seeks to allocate 25 per cent of state
government mining and petroleum royalty
revenue to projects in regional Western
Australia and some of the funding has been
provided directly to local councils. For the 2010
financial year, total royalties for regional
spending was $254 million, and for the 5-
year period ending in June 2014, total program
expenditure is expected to be $4.6 billion
(Government of Western Australia 2010).
To illustrate the impact of the Royalties for
Regions Program, consider the Pilbara region.
In the Pilbara region, one council’s annual
report noted the creation of 13 new staff
positions in 2010. At another Pilbara council,
there was an increase in expenditure of 18 per
cent between 2009 and 2010. These increases in
expenditure and staffing levels might reason-
ably be seen as investments in council capacity
that are consistent with the state government’s
objective of substantially increasing the resi-
dential population of the Pilbara region (Pilbara
Development Commission 2012). The increase
in activity undertaken by these councils is,
however, not yet reflected in increases in
outputs, as measured for this study; hence, the
calculated efficiency score for these councils
falls. The ability to identify such issues is a
strength of the study and highlights the value of
using data from multiple years in studies that
investigate organisational efficiency.
A key motivation for undertaking the study
was to empirically investigate whether or not
incorrect scale was a significant source of
inefficiency across local government service
delivery in Western Australia. As can be seen
from Table 3, the average scale efficiency score
across both years was around 70 per cent.
Although this suggests that incorrect scale is a
relatively significant issue, the scale efficiency
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307
2009 sample 1.2 2010 sample
Efficiency score
1.0
0.8
0.6
0.4
0.2
0.0
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97
measure does not provide information on
whether the problem is that councils are too
small or too big. Further analysis of the scale
efficiency scores revealed that, in 2009, there
were 57 councils operating under decreasing
returns to scale and 31 councils operating under
increasing returns to scale. In 2010, there were
51 councils operating under decreasing returns
to scale and 33 councils operating under
increasing returns to scale. Given the number
of councils missing from the sample, the
finding should not be over-emphasised. How-
ever, it does seem reasonable to conclude that
incorrect scale is a significant source of
inefficiency in the Western Australian local
government sector; that there are many in-
stances where the source of the inefficiency is
that the council is too large; and that there are
many instances where the source of the
inefficiency is that the council is too small.
5. Discussion and Further Analysis
Further investigation of DEA efficiency score
information through use of a second-stage
regression of DEA scores on environmental
variables is not universally recommended; for
example, Simar and Wilson (2011) recommend
against second-stage regression analysis. In this
case, because so little is known about local
government efficiency, it seems worth consid-
ering a second-stage regression. In the second-
stage regression analysis, attention is given to
two environmental factors that are potentially
important in explaining variation in efficiency
scores—population density and relative socio-
economic disadvantage—and two measures
that have received some attention at the
state government level in terms of the sustain-
ability of local councils—the share of total
308 The Australian Economic Review
expenditure covered by rate income and council
employee expenses per resident.
Results are presented for two different
regression models (Table 4). In regression
model (1), the dependent variable is the bias-
corrected VRS efficiency score for each
council. The model is estimated via least
squares and the reported standard errors are
heteroscedasticity-robust standard errors. Re-
gression model (2) is the single bootstrapped
truncated regression model that is introduced in
Simar and Wilson (2007). In regression model
(2), the dependent variable is the uncorrected
VRS efficiency score for each local council; the
point estimates are obtained via maximum
likelihood; and the standard errors are obtained
via bootstrapping with 5,000 draws.
Western Australia is over 2.5 million km2 in
size and some areas of the state are sparsely
populated, while the area around the state
capital, Perth, is relatively densely populated.
The population density in councils therefore
varies dramatically. Around Perth, there are
numerous councils where the population
density is greater than 2,000 people per km2,
while in the north and east of the state, there are
numerous councils where the population
density is less than 0.01 people per km2. For
regression model (1), the only explanatory
variable that is found to be statistically
significant is population density and greater
population density is associated with higher
efficiency scores. Although the effect is
statistically significant, it is also important to
establish whether the effect is significant in
practical terms. For regression model (1),
Table 4 Regression Model Exploration of Council Inefficiency
Model 1a
Variable Estimate
Population density 0.008***b
Rate share of total expenses 0.898
ABS disadvantage index –0.070
Employee costs per resident –0.004
Constant 0.464*
R2 0.019
Notes: (a) All coefficients, except the intercept, have been multiplied by 1,000 to aid exposition.
(b) * and *** denote significance at the 10 per cent and 1 per cent level, respectively.
(c) NA denotes not applicable.
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September 2013
holding all other factors constant and moving
from the least densely populated council in the
sample to the most densely populated council
would imply a change in the efficiency score of
0.023. As such, for the sample considered,
population density does not appear to be
something that is able to explain the observed
variation in efficiency scores. It is, however,
worth recalling that 10 of the 12 very large,
sparsely populated councils are not in the
sample.
For regression model (2), only higher
expenditure on staff per resident is found to
be statistically significant. The practical rele-
vance of this finding can again be investigated
by considering the range of values observed for
employee costs per resident at councils in
Western Australia. Holding other factors
constant, if employee expenses per resident
are reduced from the highest level observed in
the sample to the lowest level observed in the
sample, the implied improvement in the
efficiency score is 0.29. The maximum and
minimum values for expenses per resident are,
however, relatively extreme. If instead, the
change in efficiency scores that is implied by
moving from the top of the interquartile range
to the bottom of the interquartile range is
considered, the implied improvement is only
0.05. This finding could be interpreted as
suggesting that reliance on a single metric, such
as employee costs per resident, has only limited
value as a measure of council efficiency.
The socio-economic disadvantage measure
is calculated using information on the unem-
ployment rate, the share of low income
Model 2a
Standard error Estimate Standard error
(0.002) 0.021 (0.019)
(1.431) –2.126 (1.65)
(0.261) 0.185 (0.336)
(0.028) –0.066* (0.035)
(0.252) 0.333 (0.343)
NAc
 Fogarty and Mugera: Local Government Efficiency
households, the proportion of the population
with low educational attainment, the proportion
of households without a car, English language
fluency and the Indigenous population share
(Baker and Adhikari 2007). Higher values
indicate less relative socio-economic disadvan-
tage. It was hypothesised that councils in areas
of greater relative socio-economic disadvan-
tage might face organisational challenges that
are not adequately captured in the DEA linear
program and that this would, in turn, mean that
councils in which socio-economic disadvan-
tage is greatest would have lower efficiency
scores. Based on the results from regression
models (1) and (2), there is no evidence of such
a relationship. As a possible explanation for this
finding, it can be noted that income growth in
Australia has been strong in recent years, and
that between 1998 and 2008, real incomes for
low income households grew by 41 per cent
(ABS 2010). As such, it may be that even in
areas where relative socio-economic disadvan-
tage is greatest, the average level of household
income in these areas is now such that service
delivery in these areas is not fundamentally
more difficult than in areas of relative wealth.
That there appears to be no correlation
between rate income as a share of total expenses
and efficiency suggests that the proportion
of own-source revenue at councils is not
correlated with efficiency. Again, it is neces-
sary to be cautious in drawing implications
from this finding, but it may suggest that
equalisation funding from the Local Govern-
ment Grants Commission to support councils
with low own-source revenue-raising capacity
does not encourage inefficiency.
6. Conclusion
This study used the DEA method to investigate
council efficiency in Western Australia and to
identify the contribution of scale effects to
overall sector inefficiency. A surprising study
finding was that, for many councils, there are
significant differences between the information
that is submitted annually to the state govern-
ment and the matching values that are contained
in the councils’ audited financial statements.
This lack of consistency should be a concern for
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C 2013 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research
309
all levels of government and all agencies that
use this information, such as the Local
Government Grants Commission. The lack of
consistent data also makes objective analysis of
sector performance difficult.
The way council outputs are measured in this
study is not ideal, yet the clustering of councils
into groups of relatively efficient operators and
relatively inefficient operators is striking. This
suggests that some councils are likely to have
implemented substantially better processes and
operating practices than others. In such an
environment, forums and initiatives that allow
management expertise to be shared between
council managers would seem valuable.
In terms of the amalgamation debate, policies
that encourage consolidation only make eco-
nomic sense if larger councils tend to be more
efficient than smaller councils and if merging will
improve both pure technical efficiency and scale
efficiency. The results suggest that there will be a
number of possible council amalgamation
scenarios that meet these criteria, but also a
large number of amalgamation scenarios that do
not. To be clear, economies of scale benefits are
not delivered by simply joining two councils that
have a small population. Rather, economies of
scale benefits are realised when an increase in the
mix of different services provided by a council
results in a decrease in the overall average cost of
service delivery. The average cost at each council
will depend on the mix of services delivered, the
unique nature of the production characteristics of
each service (that is, returns to scale) and
prevailing market conditions. Thus, serving a
larger population may not necessarily translate to
service delivery at the minimum possible cost for
each service.
First version received November 2011;
final version accepted February 2013 (Eds).
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