Impacts of Municipal Amalgamations on Service Delivery: Lessons from International Examples

1. IMPACT OF MUNICIPAL AMALGAMATIONS ON SERVICE DELIVERY Municipal Demarcation Board Seminar 7 NOVEMBER 2019 For an Equitable Sharing of National Revenue

2. STRUCTURE OF PRESENTATION • Introduction • Background • What literature says • Impact of Amalgamations – Lessons from other countries – Empirical evidence from previous FFC work – Current impacts of Amalgamations • Conclusion 2 MDB presentation, 07/11/2019

3. WHAT LITERATURE SAYS ABOUT AMALGAMATION IMPACTS An optimal municipality – functionally, structurally better, more efficient. There are contradicting opinions about amalgamation to create an optimal municipality: Arguments in favour of amalgamation: – “Bigger is better and/or cheaper“, as bigger translates to improved efficiency and services, and thus more financially viable and sustainability; – “Economies of scale”, assuming that economic efficiency is dependent on the size of the local units. More residents means more service unit outputs per unit input. Rationale for large-scale infrastructure projects; – “Large municipalities have more opportunities” to support economic development on their territories through larger investments; – “Large municipalities provide better and fairer distribution” of services and tax burdens. Arguments against amalgamation: – Small and many municipalities are more efficient, more responsive to the changes in community needs, and accountability channels are clear cut. Smaller municipalities stimulate competition. • • 3 MDB presentation, 07/11/2019

4. IMPACT OR CONSEQUENCES OF AMALGAMATIONS ELSEWHERE Case & Jurisdiction Impact/Consequences Impact on Economic Efficiency & Cost Savings No significant effect of amalgamation on economic efficiency but cost savings on general administration Alleirs & Geetsma (2016) Netherlands Find significant reduction in administration expenditures Blesse and Baskaran (2016) Germany Per capita expenditure increased after amalgamations - no savings. But in general administration per capita spending increased Moisio and Ususitalo (2013) Finland Amalgamations resulted in significant increases in property taxes, compensation for municipal employees and long term debt Mijan and Spicer (2015) Canada Pre-amalgamation: Local councillors exploited last minute spending before transition Blom-Hansen (2010) Danish Municipalities anticipating merger increased their debt reforms Jordalhl and Liang (2010): Sweden 4 MDB presentation, 07/11/2019

5. IMPACT OR CONSEQUENCES OF AMALGAMATIONS ELSEWHERE Case & Jurisdiction Impact/Consequences Impact on Service Quality Amalgamation result in no change in quality of public services Alleirs & Geetsma (2016) Netherlands Quality in merged municipalities improves Reingenwertz (2012) Switzerland Amalgamations result in positive effect on public service delivery, increases product diversity, professionalization of staff Steiner & Kaiser (2017) Switzerland Amalgamation results disaffection with municipal services Kjaer & Klemmensen (2015) Impact of Democratic Outcomes Amalgamations has a detrimental effect on citizens’participation in affairs of their municipality. Distance from centre or where “things” happen is high. Lassen & Serritzlew (2011) Danish Amalgamation reduce the quality of democracy in terms of voter turnout and representation. Zeeden (2017) 5 MDB presentation, 07/11/2019

6. IMPACT OFAMALGAMATIONS ELSEWHERE We need to be cautious regarding our expectations on amalgamations. Generally there are some cost savings on administration functions. But with time such cost savings disappear. But reaping of significant economies of scale is unlikely. Local actors are rational, so when faced with compulsory amalgamation reforms, opportunistic spending arises. On quality of service delivery, evidence is mixed. But majority studies indicate that larger municipalities improve the quantity, quality and mix of local services Mergers generally undermine democratic outcomes; they depress voter turnout, reduce internal political efficacy, and negatively affect level of community attachment. Above results are from top-down mergers and results may be different in voluntary bottom-up mergers. But no such studies as these are few. • • • • • • • 6 MDB presentation, 07/11/2019

7. BACKGROUND: SOUTHAFRICA’S AMALGAMATION JOURNEY 1262 • Pre-1994 - government elections. just before the local 843 • 1995 284 • 1999 283 • 2006 278 • 2011 257 • 2016 7 MDB presentation, 07/11/2019

8. OUTCOMES OF THE SA AMALGAMATION STORY Number of Municipalities and Average Population Size 9 200 Thousands 180 8 160 7 140 6 120 5 100 4 80 3 60 2 40 1 20 0 0 Number of Municipalities Average Population Size per Municipality 8 MDB presentation, 07/11/2019

9. OUTCOMES OF THE SA AMALGAMATION STORY: MUNICIPALITY SIZES Average municipal size in selected countries (number of inhabitants) IDN TZA KOR JAM GBR ETH CIV South AFrica average population size ECU NER DOM CMR DNK TUR COG Average population size for 86 countries LTU MEX NLD TUN AUS SWE PRT THA BGR SEN MLI MAR ARG OER LVA NOR SNV USA CAN DEU ROU AZE LUX ISL AUT ARM PHL MDA SVK CZE 0 100000 200000 300000 400000 500000 600000 9 MDB presentation, 07/11/2019

10. OUTCOMES OF THE SA AMALGAMATION STORY: MUNICIPALITY SIZES 16 Thousands Size of South African muni. area (km2) 14 40 Thousands 12 32.733 35 30 10 25 20 8 15 10 6 5.279 5 0.251 4 0 Karoo Hoogland Umdoni Average 2 0 Denmark Slovak Republic Poland South Africa Belgium Japan Latvia France Italy Greece Sweden Chile Czek R. Estonia Norway Mexico Iceland Israel Germany Finland Australia Austria Slovenia Canada Netherlands United States Ireland Hungary Spain Portugal Luxenburg Korea Turkey United Kingdom New Zealand Switzerland 10 MDB presentation, 07/11/2019

11. OUTCOMES OF THE SA AMALGAMATION STORY: MUNICIPALITY SIZES Number of councillors Number of citizens per councillor Republic of Ireland (2014) 949 4861 New Zealand (2000) 1892 2039 Philippines (2000) 2102 37075 Malaysia (2000) 2921 7654 Nepal (2000) 3344 7099 Australia (2000) 6637 2886 SouthAfrica (2011) 9090 5671 Canada (2014) 19534 1819 Japan (2000) 62452 2031 China (2000) 653244 1933 11 MDB presentation, 07/11/2019

12. SOUTHAFRICA’S BIGGER MUNICIPALITIES: CONSEQUENCES SouthAfrica’s amalgamation has resulted in bigger municipalities South Africa is among the countries with the lowest number of municipalities but has one of the highest average population sizes per municipality Consequences of large municipalities are: – Compromises democratic values and makes local government to be far from the people – citizenry participation, save for technological connected municipalities. – More citizens per councillor, which compromises representativeness – Service delivery is possibly compromised as people are no longer closer to their representatives and government – Costs of services for bigger municipalities is high, electricity connections – Costs on governance are equally high – Compromises accountability • • • 12 MDB presentation, 07/11/2019

13. IMPACT OF DEMARCATIONS: EMPIRICAL EVIDENCE FROM PREVIOUS FFC WORK The FFC has been working on demarcation impacts since 2013 when Tshwane municipality requested the Commission to evaluate the impact of its merger with other municipalities. The Commission broadened this exercise to include case studies of other municipalities that have gone through mergers The Commission concluded that demarcation processes: – Are costly, and in the short run and affect the financial sustainability of municipalities have potentially negative effects on the viability of affected municipalities. – The main cost drivers include the integration and consolidation of programmes, upgrading of data services; rationalisation of services, fees and tax rates, payroll systems, voters roll and administrative policies; change management costs; harmonisation of systems, harmonisation of asset registers, human resources policies, wages, salaries and allowances; and costs associated with coordination, communication, retraining and retooling of workers. – Overall, if demarcations impose such costs the possibility of disrupting service delivery is very high • • 13 MDB presentation, 07/11/2019

14. IMPACT OFAMALGAMATIONS IN SOUTH AFRICA- CURRENT FFC WORK Local government equitable share allocations GVA per capita 3500 62 60 3000 58 2500 56 2000 54 1500 52 1000 Before Amalgamation After Amalgamation Before Amalgamation After Amalgamation 50 500 48 0 2013/14 2014/15 2015/16 2016/17 2017/18 2013/14 2014/15 2015/16 2016/17 2017/18 Average Average Many post amalgamation municipalities have had their LES reduced, due to the adjustment factor to account for its ability to raise own revenue (e.g. Tshwane). As such, their budgets for basic services have been constrained Amalgamated municipalities have had their per capita GDP fall before it picks up- implying poverty has increased post demarcation period • • • 14 MDB presentation, 07/11/2019

15. CONCLUSION Previously the Commission has recommended – That before the actual decision to change boundaries is pronounced, the financial and fiscal implications of boundary changes should be established – That a transitional demarcation grant be awarded to the amalgamated municipality to facilitate the restructuring process and to minimise the effect of demarcation on municipal budgets. This was done in 2014. The huge costs associated with boundary changes demand a relook at the frequency of demarcations. Very frequent demarcations can be disruptive and counterproductive to many policies and initiatives to improve the wellbeing of municipalities. The Commission encourages stakeholders to consider alternatives to amalgamating municipalities, e.g. incentivising cooperation between municipalities, encouraging regional development, to encourage voluntary amalgamations - bottom up approach. • • • 15 MDB presentation, 07/11/2019

16. THANK YOU. Financial and Fiscal Commission Montrose Place (2ndFloor), Bekker Street, Waterfall Park, Vorna Valley, Midrand, Private Bag X69, Halfway House 1685 www.ffc.co.za Tel: +27 11 207 2300 Fax: +27 86 589 1038 MDB presentation, 07/11/2019