Is the challenge that councils face insufficient revenue to cover costs? Or is it that they are providing services outside their remit? Or is it waste and inefficiency in their operations? Is it all of the above? And, if it is, where do you start to address it? Asks Lancing Farrell.
When you look at the different things councils are doing to respond to the rate cap – arguing for its removal or modification to enable higher rate increases, cutting services and service levels, shaving 10 per cent off every budget to force savings, or implementing an ‘efficiency dividend’ through successive budgets – you could be forgiven for wondering if councils are trying to solve the same problem.
Having a common view of the problem to be solved is a start to genuine and effective action across the sector. I have been thinking about a simple reframing of the problem councils need to solve in a rate-capped environment.
So what is the problem?
Councils, for the first time in decades, have had a limit placed on their taxation revenue. In the decade before 2015, councils across Australia increased rates by an average 6.7 per cent per annum. In Victoria, ratepayers have revolted and supported the rate cap that the state government imposed in 2016.
At the same time, those very same ratepayers are placing more demands on councils in an environment when council costs are going up rapidly because of inflation. Costs are growing much faster than revenues.
A common response to government challenges is to ask ‘what would the private sector do?’
What would the private sector do?
In response to increasing costs, if they could, they would put prices up, and we have all seen this happen when there is no genuine competition. When there is competition, businesses have had to re-think the services they deliver and how they deliver them. Typically, they do this by studying their customers and what actually adds value for them. In times of change, this is what is important. Customers will keep buying your services if those services meet their needs and expectations. They might even accept price increases within reason. Alternatively businesses may reduce their offering and provide it at the same cost – shrinkflation!
An important thing to remember is that businesses in competitive markets are subject to demand and supply curves. When demand increases, they are motivated to increase supply of their services and, in the process, earn more revenue to cover their additional costs. In comparison, in a rate-capped environment, councils just get extra costs when they get extra demand. It would seem that understanding that demand is central to knowing what to do. It is important to note that there are two ways councils get extra demand – the first is through growth in population and the number of people demanding services, and the second is when communities want more or better services.
With the first there should be a corresponding increase in income, however if the councils are already facing a delivery squeeze and costs exceed income, the squeeze just becomes tighter. The second, for more or improved services, either requires new revenue or cuts to expenditure on services to free up resources – typically community don’t want to cut services.
What do councils know about demand?
This is the fundamental question. My experience has been that when councils get more demand for services, they put their hand out for more money from rates so that they can get extra resources to expand services and meet the demand. In their minds and operations, another unit of demand necessitates another unit of resource. In the past, these increased costs have just been passed on to the community, hence the 6.7 per cent per annum rate increases.
It is apparent that communities want more effort from their council to contain costs by focusing on doing what really matters to them. Reporting on last year’s local government elections in Victoria showed that many of the 2,000 candidates say they want to focus attention on getting ‘back to the basics’. The community elected many candidates promising better local services. In a cost-of-living crisis, as Australia is currently experiencing, more value from rates is becoming important to communities.
The main thing that needs to be understood about demand when it increases, is differentiating between an increase in value demand (i.e. demand councils want because it is what they are here to do) and failure demand (i.e. demand councils don’t want that only occurs because they haven’t done something or done it properly, which then unnecessarily consumes more resources in re-work).
Do you know which type of demand is driving the increase in demand at your council?
What matters about the difference in demands?
Let us assume the increase in demand is value demand. By that, I mean services that the community need and expect, and which create value for them.
That demand could be coming from infrastructure the community owns (i.e. roads, parks and buildings) that are effectively saying ‘clean me’, or ‘maintain me’ to the people responsible for caring for them. This is a key point that managers working from council operations centres know better than most. They understand that assets need to be maintained to achieve their expected service life based on actual asset condition if you are going to minimise whole-of-life expenditure. Good managers ‘listen’ to their assets and proactively maintain them.
If they wait until road users, or park users, or building users tell them they have noticed a problem with public infrastructure, it is too late. A pothole is a sign of preventative work not done, not the work that should be done. Reactive maintenance is more expensive than proactive maintenance, and it often means that people don’t enjoy using public infrastructure because it is damaged or unclean. For clarity, most reactive maintenance is failure demand and most proactive maintenance is value demand.
If your increase in demand is from value demand, and you cannot increase your revenue to pay to meet that demand, you need to start re-thinking your operations. How else can the demand be met? The old saying that ‘necessity is the mother of invention’ seems to have particular resonance. The way things are done now isn’t the only way of doing them.
Of course, you could become more creative and help others to take up the demand being placed on the council. This seems to have been the cornerstone of Wigan Council’s The Deal 2030. They worked with not-for-profits, churches and community organisations to shift demand away from council services and onto their services. They called it demand management.
It makes sense if those community-based organisations are better placed to provide services and meet the demand. This works for many social services. It doesn’t work as well for infrastructure services. It also needs those service providers to be adequately resourced and capable of taking the extra demand. If they fail, as seems to have happened in Wigan, people will come back to council services for the help they need.
It is another form of failure demand, this time it is failure by other organisations that leads to the increased demand for council services.
How can councils find resources?
I am going to assume that current council operations have not been rigorously and systematically reviewed to ensure that only value demands are being met, and that those demands are being met as efficiently as possible. By that I mean, the council is not confident that it knows it is doing the right things, and those things are being done well. This is an important point.
Effectiveness means doing the right things, and this should be the starting point in responding to increased demand and re-thinking services. Many councils start by going on an efficiency drive (it is not only councils – in the US, Elon Musk heads the Department of Government Efficiency, not effectiveness!). There is no point going on an efficiency drive if the services you are making more efficient are services that shouldn’t be provided or provided in the way they are. By this I mean they are services that others are better placed to provide or that people can provide for themselves.
An example that helps illustrate how this works is turf cricket wicket preparation. At some point, probably in the 1970s, many councils in Melbourne took over control of turf cricket wicket curation. The sport was becoming more professional and wickets are expensive to make and they need careful curation to prepare them for play. It is a skilled job. The expansion of turf cricket competitions as clubs moved away from playing on matting meant that a lot of curators were needed. Councils were lobbied by cricket clubs and those councils with resources stepped in and employed workers to make cricket wickets.
This all changed for many councils in Victoria after the reforms of the 1990s, when lack of funds meant clubs were asked to start preparing their own wickets again. This had remained the common practice in country Victoria, so it was well known that clubs could prepare high standard wickets. Most councils continued to help clubs with pre-season preparation. Some councils continued to supply and maintain wicket rollers and shavers because the equipment is expensive. The clubs found a member who had the time, interest and skills to prepare the wicket as a volunteer or for a stipend. It became a partnership between the council and the community.
The change didn’t stop cricket, and teams have continued to play cricket on turf wickets and competitions have expanded since the 1990s.
The council workers no longer required to prepare turf wickets were reallocated to other duties, usually in maintaining sports ovals. Around the same time, ovals started to be constructed in ways that made them an asset that is consumed and replaced. The safety of players in Australian Rules Football had become a focus of research. Grass surface quality and soil hardness featured in common injuries. Ovals became a managed asset with specific performance requirements. If appropriate maintenance was not provided they would need premature replacement or extensive repairs.
Resources that were reallocated from turf wicket curation were put to use making sure ovals were well maintained. A change in the way one demand was being met made resources available to reallocate to another new demand. This is an example of how councils have responded to reduced revenue and growing demand for services in the past.
How should this knowledge influence thinking today?
Councils need to reframe their thinking. The challenge is learning how to understand and then meet community value demands within the available resources, which includes enabling the community to do more for itself. This could include the community asking for relief from the rate cap and the ability to pay more for services that they value. My thinking is that, at least in the first instance, it will mean eliminating failure demand and waste to free up capacity and prove to the community that everything is being done that can be done with current resources.
Simply cutting budgets and services will not solve their problem. It will create hardship in the community and increase psycho-social injuries to council staff as they become more stressed trying to cope with both additional demand and the community response to cutbacks. Revenues are going to remain limited until communities say they want to pay more rates. That is how the rate cap works.
My experience tells me that in existing council services provided to meet current community demands, there is failure demand and waste. Both unnecessarily consume resources and reduce capacity to meet new demands. Failure demand can be 20 to 80 per cent of the work being done in a service. Waste (using the Toyota Production System definition of any activity that does not directly add value for the customer) will be a similar percentage and not all of the waste will be avoidable.
For the sake of this exercise, let’s assume failure demand is 20 per cent of the demands currently being met and avoidable waste is 10 per cent of the effort in meeting the remaining value demands. This means there is the potential to reallocate 30 per cent of current capacity to meeting new demands. That is the equivalent of a 30 per cent increase in revenue or a 30 per cent reduction in costs. My figures are conservative.
The change required is systemic. Failure demand and waste is produced by the system of work. Systems thinkers have devised many ways to understand systems of work and find and fix systems problems. Councils need to find one that works for their culture and capability.
What won’t work is throwing the problem to the community to solve through arbitrary service cutbacks, or throwing it onto individual managers to solve through arbitrary budget cuts. A way of working together is required to understand demands, and improve the response to value demands so that failure demand decreases.
I don’t know of any Victorian council seeking to make 30 per cent increases in revenue from a higher rate cap or new fees and charges, or any council trying to cut budgets by 30 per cent. I do know of councils that know they will need 30 per cent more annual funding for their long-term financial plan to work and enable all services and assets to be provided.
It is time for reframing to an agreed and realistic and achievable approach to solving the problem.
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