Assessing the Performance of Local Government

Stevens, Philip Andrew, National Institute Economic Review

We consider the measurement of performance in the public sector in general, focussing on local government and the provision of library services by English local authorities in particular. We will consider two methodologies that assess the performance of local authorities in terms of the efficiency with which they provide services and consider methods that allow us to account for exogenous influences on performance, such as the socio-economic profile of the population served by the authority. We find that although both methods' results appear similar, the implications for potential cost savings vary widely. Omitting to account for background factors leads to an overstatement of the level of inefficiency and hence the scope for reducing expenditure.

Keywords: local government; efficiency; SFA; DEA JEL classification: D20, H40, L32

I. Introduction

The performance of the public sector is always an issue that attracts interest. There are two reasons for this; one is its size and the other the services it provides. The public sector represents a sizable proportion of the economy, and it is getting bigger. According to OECD figures quoted in the Financial Times (22/03/05), the share of general government spending in GDP is forecast to rise from 37.5 per cent in 2000 to 45.2 per cent in 2006. Moreover, any inefficiency is likely to have a major impact upon the nation's welfare.

Education, policing and the like affect the whole of society and the vulnerable in particular. Crime affects the poor disproportionately, partly because the wealthy can move to safer areas or purchase security measures. The private sector often cannot be relied on to produce these services efficiently and/or equitably. Indeed, it is precisely because of this that many services are provided or at least financed by the public sector. The difficulties in the measurement of the output and performance of the public sector arise in great part for the very same reasons that the services are in the public sector in the first place.

In this paper we consider the measurement of performance in the public sector in general, focussing on local government and the provision of library services by English local authorities in particular. We will consider two methodologies that assess the performance of local authorities in terms of the efficiency with which they provide services and consider methods that allow us to account for exogenous influences on performance, such as the socio-economic profile of the population served by the authority.

In section 2 we outline the main issues surrounding assessing the performance of public sector organisations and relate these to local government. Section 3 discusses techniques of efficiency analysis. In section 4 we describe the data used in our empirical analysis. Our results are discussed in section 5 and section 6 provides some concluding comments.

2. Assessing public sector performance

There are three main problems in assessing public sector performance: identifying the outputs, the absence of prices, and the problem of attribution. It is useful to make an important distinction between activities, outputs and outcomes. Activities are the units of provision, for example the activities of the highways department of a local authority would include the number of checks carried out and the number of road repairs carried out. Outputs may require a bundle of activities; having a properly functioning road requires both that it is checked for problems and that these are fixed when required. Outcomes are the characteristics of outputs which affect utility, in our highways example it might be having free flowing traffic on the roads in an authority's region.

It is often difficult to identify what the outputs of public sector organisations are. There are some services where it is difficult to identify any of the outputs. The problem is that we tend to observe activities rather than the actual outputs. This has led to a concentration on processes (which can be easily counted) rather than the outputs the service was designed to provide. Thus in many cases the focus has become one step removed from the organisations' raisons d'etre.

Even if we can observe and measure the outputs of government, the services it provides, we seldom observe output prices. Thus it is difficult to aggregate the many services that organisations within the public sector provide up to an organisation-level indicator, much less a sector-wide measure of performance. In markets, prices carry important information about the value of the goods and services traded to the consumer--through their willingness to pay--and to the provider--since providers will not generally offer goods and services of which they cannot cover the costs of providing them.

The third problem is that of attribution. Many of the outcomes which government (either local or national) seeks to affect are influenced by other factors. Certain local authorities may find it difficult to provide waste collection services because they are sparsely populated. It is important to remember that what we are interested in is the marginal impact of the public sector. This accords with what is often called 'value added'.

The problems of identifying the outputs and the lack of prices in the public sector led to its output being measured by the amount of money spent for a long time. Thus in the public sector, if nowhere else, it could be said 'we must be doing better, we are spending more'. Productivity measurement was, therefore, impossible by definition.

Valuing local government outputs

There are two related reasons why is it so important to measure prices. The first is to allow us to aggregate outputs--to add up apples and oranges. In the private sector, the relative valuation of two products or services is simple since under certain assumptions the relative prices tell us all we need to know. The second use for prices is to account for quality change. If the quality of a good in the private sector improves over time, ceteris paribus, its price will increase. Thus relative prices allow us to compare different goods within and between years.

Products and services have a number of characteristics that are valued by consumers, which are reflected in their prices (Deaton and Muellbauer, 1980). For example, when we compare computers, we compare CPU speed, memory, and hard-disc size; when we compare houses, we consider the number of bedrooms, the floor-space, and the characteristics of the neighbourhood. Turning to local government, the characteristics of waste collection for example would include the frequency of collection, whether waste is collected from the home or the roadside, and aspects of recycling. The characteristics of library services might include the number, type and availability of items. In the hedonic pricing literature the implicit prices of the attributes of differentiated goods are derived by observing the joint variation of product prices and bundles of product characteristics. The estimated coefficients represent shadow prices of product attributes (i.e. the value of an additional unit of attribute holding the other attributes constant). The lack of prices for most publicly provided goods do not allow us to do this.

There are essentially five ways that one might overcome the lack of prices for public sector outputs. First, one might use prices from similar services operated in the private sector. Second, one might try to replicate the market by considering the impact of public services on outcomes. Third, we can use the costs of providing the services. Fourth, one could use value judgement weights. Finally, we could use the pattern of outputs or activities that are actually provided by authorities to impute shadow prices implicitly used by providers. Each of these methods has its strengths and weaknesses.

A common way to overcome the lack of prices in the analysis of the public sector is to ignore the problem. That is, one can use a method that does not require weights to be defined and allow the data to determine them. Thus we use the outcome of managerial and policy decisions by service providers implicitly to calculate the shadow prices of each output or activity that was used to determine levels of provision. This is the tacit assumption made in efficiency analysis using methods such as data envelopment analysis, although it is seldom declared so baldly (see Stone, 2002, for an honourable exception).

Local government in England

An important question--and one that goes beyond the scope of this paper--is why we have local government in the first place. In a large part, the division of labour between central and local …

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Publication information: Article title: Assessing the Performance of Local Government. Contributors: Stevens, Philip Andrew - Author. Journal title: National Institute Economic Review. Issue: 193 Publication date: July 2005. Page number: 90+. © 1999 National Institute of Economic and Social Research. COPYRIGHT 2005 Gale Group.

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