The success of amalgamated councils 

Now that several years have passed since the forced local government amalgamations of NSW in 2004 and Queensland in 2008 the question is being asked, have they delivered in line with expectations?

A key rationale for amalgamation was that services are relatively the same from one council to another, therefore presenting compelling opportunities for consolidation and rationalisation of staff and other resources. However, recent reports have indicated that the larger amalgamated councils are not performing as well as their smaller counterparts.

This has been attributed by some to increased size not translating to increased performance, however, I wonder how much of the disappointing performance is a legacy of the amalgamation process, and how much of the performance gap is impacted by the financial measures used in comparisons.

To understand why amalgamated councils are underperforming in comparison with those that did not amalgamate, I think it is helpful to understand:

  1. The unique factors at play in the local government sector and how they impact on the usefulness of traditional, finance based comparative performance measures
  2. The level of investment required to successfully merge organisations and how council amalgamations fall short.

Unique factors at play

Private sector companies will not offer products or services that they are unable to generate a profit from, and will jettison assets that cost more to maintain than the benefit they generate.

In stark contrast, councils cannot choose their customers, service offerings or the majority of their assets. Councils don’t have the option to cease providing services to a remote locality within their local government area (LGA) just because the revenue received doesn’t cover the costs.

Unique topographic features of LGAs need to be considered when comparing their councils on financial flexibility, liquidity, debt service capacity and asset management due to them being so varied and largely outside the local government’s control.

Investing in a successful merger

Mergers are challenging at the best of times. There is the potential for bleeding of talent and resources as the process creates additional tasks (on top of existing workloads) that have to be completed in collaboration with strangers in a climate characterised by emotions running high and time constraint pressures.

There is a lot at stake in a merger, but much more to gain if it works, which is why companies invest so much in getting it right.[1]

The table below outlines some of these investments and compares them to local government. This is not meant to be a criticism – there are legitimate reasons why councils spend less on amalgamations than companies on mergers – but is meant to contribute to a broader understanding of why it is that merged councils are under performing.

Private Sector Mergers Local Government Amalgamations
Choice as to what will be retained from each entity – customer segments, product or service offerings and assets (taking the best from each entity). No choice.

Requirement and obligation to continue public services.

The choice to merge, and which organisation to merge with is based on careful considerations, including compatibility of vision, culture and strategic fit. No choice.

Decision to amalgamate based on proximity of LGAs and state or federal policy agenda.

Often hire large specialist consulting firms to organise and run the merger. Comparatively small investment in specialist assistance and support.
Often put in place a ‘merger intent’ document that outlines the financial, strategic, operational and organisational expectations for the merged entity in 1, 2 or 3 years and allocated responsibility for delivering on them. Comparatively low strategic forward planning and accountability.
Careful consideration and investment in talent management to ensure the best staff from both sides are retained. No additional investment beyond existing HR departments which do not traditionally have strong core competencies in talent management.

When assessing the performance of amalgamated local governments, comparing their financial performance with non-amalgamated councils requires a number of topographic variables to be taken into account. It is also worth considering whether performance issues observed in amalgamated councils are a result of increased size, and which issues are legacies of under-resourced and/or poorly managed amalgamations.

[1] Ashkenas, R. Francis, S. & Heinick, R. “The Merger Dividend”, Harvard Business Review, July-August 2011

Carey, D. “Lessons from Master Acuirers: A CEO Roundtable on Making Mergers Succeed”, Financial Markets, May-June 2000

Michelle Quinn
Senior Consultant