This document discusses alternative models for achieving local government financial sustainability. It argues that the focus should be on sustainability of the communities local governments serve, not just the financial sustainability of councils themselves. Considering community sustainability has implications, like councils facilitating other institutions that support communities and reduce long-term burdens on councils. The document also distinguishes between a council's provision of services and production of services, with alternative models like California taking production out of council control through contracting.

1. SETTING THE SCENE
FOR FINANCIAL
SUSTAINABILITY -
ALTERNATIVE
MODELS & WINNING
THE LICENCE TO
OPERATE
A presentation to the Local Government Financial
Sustainability Conference, Sydney NSW, 11 March 2015
Peter McKinlay
Research Associate
Institute for
Governance and
Policy
StudiesVictoria
University of
Wellington
peter.mckinlay@vu
w.ac.nz

2. 1
Setting the Scene for Financial Sustainability - Alternative
Models & Winning the Licence to Operate
Introduction
Destination 2036 implied a 25 year horizon in thinking about the future of local
government. The NSW Independent Local Government Review Panel recognised
this but shifted its focus more to the immediate pressures on local government
partly because if you don’t have a viable present, you’re unlikely to have a long-
term future. That’s been echoed as well by the state government’s Fit for the
Future initiative where the emphasis is very much on the theme of financial
sustainability.
In this presentation I want to take the same approach as Destination 2036 in
emphasising that we should be thinking about sustainability not just for the short
and medium term but for the long-term.
I also want to go further. For people working in local government it may look as
though your sector has been through a great deal of change if you look at a
number of the initiatives which have taken place in different Australian states
over the past 10-20 years. We have seen marked changes in reporting and
accountability requirements with a growing emphasis on the community. We have
seen significant changes in areas such as planning legislation. The debate about
the constitutional position of local government and the associated uncertainty
over federal government funding for local government has been a major
preoccupation. The role of local government in areas such as climate change and
environmental protection has become much more prominent.
What I want to suggest is that despite all the apparent activity, local government
has undergone far less change in relation to changes in its external environment
than almost any other sector. Over the past 20 years globalisation, the rise of the
Internet, the impact of technology on employment and how we do business,
demographic change and major shifts in relative economic power internationally
have had huge impacts on virtually every sector of the Australian economy.
Local government may argue that trends such as demographic change and the
impact of technology on employment have impacted dramatically and
differentially across local government with the obvious and growing differences
between metropolitan, regional, provincial and rural councils. Certainly the
impacts have been considerable but unlike, for example, the automotive industry,
local government still has a future. Furthermore, as institutions, councils have
generally continued to exist at the same or a larger scale and generally council
staff have enjoyed secure and ongoing employment.
The theme of this conference is Local Government Financial Sustainability. The
obvious implication is that our focus should be on the sustainability of a set of
special purpose institutions. What I want to suggest is an extended focus: the
financial sustainability of the communities which local government serves.
Considering the difference and its implications will be the subject of the first
section of this presentation. Remaining sections will look at the difference
between provision and production (something fundamental to the sustainability of
local government), the role of alternative models, and how good engagement
underpins financial sustainability.

3. 2
Whose financial sustainability matters - the community’s or the
council’s?
Let’s start by looking at the TCorp definition of financial sustainability for some
guidance. After considering what it regarded as relevant research, TCorp
developed its own definition:
A local government will be financially sustainable over the long term when
it is able to generate sufficient funds to provide the levels of service
and infrastructure agreed with its community. (Emphasis added).
It’s a definition which appears to place equal weight on the council and the
community as partners in determining the council’s long-term funding path.
However when it comes to assessing long-term financial sustainability, TCorp
relies on 10 financial indicators, and has no measures regarding the effectiveness
and legitimacy of the processes which the council uses to reach agreement with
its community. Instead, in its findings it simply notes “4. Consultation with the
community is required - Addressing the expected continued deterioration of
councils’ financial positions will require an extensive consultation process with
the community to consider a combination of revenue increases, expenditure
reductions and service level reviews.”
That finding itself continues the focus on the financial sustainability of the council,
rather than of the community. Whilst this might seem little more than a semantic
quibble, the implications are significant. They include:
 Communities have a range of needs and requirements for services which
go well beyond those provided by local government but where the
boundary is fuzzy and councils will be more and more called on to address
gaps in service provision - for example in areas such as ageing in place,
reconnecting youth to employment and much more.
 Quite often these demands reflect a lack of capacity/capability in
communities which have tended to rely on formal institutional providers
(councils, government agencies, substantial NGOs) so that the community
sustainability issue becomes one of building capacity/capability and the
return for the council becomes a lesser demand to extend its own
activities into new areas.
 Focusing solely on the financial sustainability of the council can in practice
create a sense of conflict between the council, and other community
focused institutions.
 Taking a ‘community sustainability’ approach can focus the council’s
attention on how it can facilitate/enable the emergence of other
community focused institutions which can themselves generate potentially
significant resources for community support thus amongst other things
reducing the long-term burden on the council. Examples include
community banking and the emerging community foundation movement.
Arguably, the latest guidance for integrated planning and reporting appears to
favour the community sustainability approach noting “the planning process will
consider the issues and pressures that may affect the community and the level
of resources that will realistically be available to achieve its aims and
aspirations”. (Emphasis added)

4. 3
Focusing on the financial sustainability of the community rather than the council
also allows two other very important themes to be more easily considered. The
first is that the long-term sustainability of the community depends not just on
local government services but on services provided by other tiers of government.
A financially sustainable community is one which is able to meet all of its needs,
and whose citizens are able to enjoy the quality of life to which they are entitled,
once they have received the full mix of services provided not just by local
government but by all three tiers of government. In other words the focus needs
to be not just on local government but on the ability of three tiers to fund the
services which the community requires and is reasonably entitled to expect from
the public sector.
The second theme and one which is gaining increasing attention in Australia (for
example with the Far West initiative within the state government’s Fit for the
Future program) is how best to deal with the situation in which a number of
Australia’s more remote rural and regional communities are inherently
unsustainable under the current distribution of responsibilities for services and
funding. Focusing on the financial sustainability of the community provides a
better means of addressing the question which will need to be answered not just
by state governments, but by the Federal government as well and based on a
clear understanding of what obligation Australia as a whole accepts to ensure that
all of its citizens, wherever the they choose to live, have reasonable access to an
agreed minimum mix and standard of services.
The difference between provision and production
First, to definition. Provision is the decision which a council makes regarding the
range nature and quality of services which it considers should be available to its
community. Production concerns the decision about how individual services
should be delivered and by whom.
The default position in developed Westminster democracies (the UK, Canada,
Australia, New Zealand) has been that councils should be responsible for both
provision and production. This can be seen, for example, in the chequered history
of endeavours in each of these jurisdictions to develop shared services where,
until recently, only one jurisdiction, British Columbia, had developed an ongoing
successful and comprehensive approach to shared services through its regional
district system1.
This is in marked contrast with a number of other jurisdictions where it’s common
to recognise the distinction between provision and production, and to treat those
as two separate decisions. The standout example is California’s contract cities
network2. This is a grouping of approximately 500 mainly small and medium-
sized councils which contract out all of their services with the core council role
essentially being one of deciding what services and then procuring from a mix of
other councils, NGOs, the private sector and other providers. The underlying
rationale is a very strong commitment to local democracy coupled with a
recognition that smaller councils are not well placed to be efficient service
deliverers, but can be very effective purchasers especially when there is a well-
established market in local government services, something which is typical of
much of the United States.
1 for a comprehensive overview of the British Columbia experience see Walisser, B., Paget, G. and
Dann, M. "New Pathways to Effective Regional Governance: Canadian Reflections" in Sansom, G. and
McKinlay, P. (eds) "New Century Local Government: Commonwealth Perspectives", Commonwealth
Secretariat, London, 2013.
2 See www.contractcities.org

5. 4
The research literature on local government practice in the United States
illustrates just how sophisticated the approach to producing services has become.
As the following quotation illustrates, the use of a wide range of different options
is both well-established and has a relatively long history:
Oakerson3 has identified seven generic methods: (a) traditional ‘in-house
production’; (b) ‘coordinated production’ where councils cooperate on
activities affecting both jurisdictions; (c) ‘joint production’ where
municipalities use a single production unit; (d) ‘intergovernmental
contracting’ where municipalities contract services from other councils or
other tiers of government; (e) ‘private contracting’ where councils contract
with private entities; (f) ‘franchising’ where private entities produce
Council services which residents can purchase; and (G) ‘vouchering’ where
local authorities set service standards, but private entities produce the
services in exchange for council vouchers. (Sourced from S. Lago-Pe-as &
Jorge Martinez-Vazquez (eds), The Challenge of Local Government Size:
theoretical perspectives, international experience and policy reform,
Edward Elgar Publishing 2013, google e-book p247).
Experience in England provides some very useful lessons for local government in
Australia including NSW. Until around 2010 experience with shared services or for
that matter other approaches to production of services outside the ‘core council’
option was extremely patchy. Although there were some encouraging examples,
generally councils were extremely reluctant to shift from the traditional approach.
Although there were some technical obstacles, the main barriers were internal at
both governance and management levels as can be seen in the following
quotation from a study at the time:
“Importantly, however, there are also behavioural and political obstacles,
linked to individuals’ careers or the risks of reducing headcount that also
delay progress. The urge to protect local authority autonomy is
understandably strong. This can manifest itself in the desire by elected
members to maintain self-determination over frontline services (outputs)
and back-office support functions (inputs). For some, the concept of
sharing infrastructure or management functions with another local
authority is an anathema. Furthermore, the idea of relocating staff outside
a political boundary is difficult to agree, as is sharing control of support
services or buying from a neighbouring authority, even at a lower cost.”
(From Stop, Start, Save: Shared Service Delivery in Local Government,
Deloitte UK 2009 accessed at
http://www.fmi.ca/media/27262/UK_GPS_StopStartSave.pdf )
In 2010 the general election produced a new government, a Conservative/Liberal
Democrat coalition, committed to substantial cuts in public expenditure in order
to bring government’s fiscal deficit under control. At the time, some 75% more of
local government revenue came from central government grants reflecting the
reality that local government delivers a number of major central government
mandated services. The impact of government decisions on local government
revenue was massive as government cut funding for local government
proportionately more than for any other central government funded activity.
According to the English Local Government Association “By May 2015,
Government funding for councils will be 40 per cent lower than in 2010”.4
3 Oakerson, R.J. Governing Local Public Economies: Creating the Civic Metropolis. Oakland, California:
ICS press, 1999.
4 See
http://www.local.gov.uk/documents/10180/5533246/On+the+Day+Briefing+Autumn+St
atement+2014.pdf/bc59ad98-25f2-4188-a166-c0511d2d3ba2)

6. 5
For local government the previously unthinkable became the inevitable. A 2013
review of local government practice undertaken by the local authority think tank,
Localis, observed “… councils see working more collaboratively and in
partnerships – both with other local authorities and with other arms of the local
public sector – as essential and something they are particularly keen to improve.
Supplying services across organisational and geographic boundaries through
shared services and trading services (e.g. through community budgets), plus
more novel joint-venture type partnering is seen by many as only way that local
public services can survive.” 5
The result has been the emergence of a very wide range of innovations in how
services are produced. The London Borough of Lambeth has rebranded itself as
the cooperative council, encouraging its communities to take over operating
council services through community controlled cooperatives. Lambeth is the
founder of what is now known as the cooperative councils innovation network
(www.coopinnovation.co.uk/).
Gloucester City Council has established a centre of excellence in the city for local
government revenues and benefits administration which it intends will sustain
local employment and bring new business to Gloucester through the provision of
outsourced business process services to other local authorities around the UK.
The London Borough of Barnet has repositioned itself as “the commissioning
Council” with the explicit purpose of ensuring that each service it provides is
produced by the best qualified provider through what it calls its One Barnet
strategy. The following material draws on a Localis report ‘Meeting the challenge
in Barnet: Lessons from becoming the Commissioning Council’ .6
“One Barnet was about looking beyond existing provider arrangements, going
back to first principles and asking fundamental questions about local services: Is
the service necessary; is it giving customers what they need; and who is best
placed to manage and run it? The programme was driven by the three One
Barnet principles, which continue to underpin how we operate:
The One Barnet Principles:
A new relationship with citizens
• We will provide a better service, putting citizens at the heart of what we do. In
return, we expect that citizens will do what they can for themselves, their families
and their community.
A one public sector approach
• Residents want good, efficient services, no matter who provides them. We will
work with partners to create truly joined up services, with the citizens at their
heart.
A relentless drive for efficiency
• We will make sure every pound is spent as effectively as possible, which may
mean providing services in different ways and certainly means organising the
Council in a different way.”
5 ( From “Changing Places – how innovation and transformation is taking place in local government,
Localis UK 2013 accessed at http://www.localis.org.uk/article/1526/Changing-Places.htm )
6 See http://www.localis.org.uk/images/loc_barnet_commissioning_web.pdf

7. 6
Fundamental to One Barnet was a staged approach, with each project following a
common development path as part of the programme:
The experience in England since the commencement of the present government’s
austerity program and the dramatic reduction in local government funding is that
councils do have the capability to develop new ways of delivering services and
substantially reducing costs and increasing efficiency. What the experience also
suggests is that bringing councils to the point at which they are prepared to take
the fundamental decisions required means placing them in a situation in which
there really is no choice.
The implications for councils in similar jurisdictions are well worth thinking
through. The evidence is now on the table that shared services and other
approaches to finding better ways of producing services can work and can
produce significant gains. It changes the context for jurisdictions such as NSW by
demonstrating to higher tiers of government the potential scope for improvement
if only councils can be got to the point at which they are prepared to make the
necessary changes.
Arguably the conclusion is obvious. Get there through voluntary arrangements
before a higher tier of government intervenes to ensure councils in practice have
no choice but to focus on finding the most effective ways for producing the
services they currently provide.
Don’t just do the right things, do them in the right way - the role of
alternative models.
Looking at international practice not only highlights a contrast between the way in
which councils in Australia provide and produce services as compared with many
councils in Europe and North America. It also highlights the extent to which in
Australia services produced within the council ‘family’ are produced by the council
itself as an organisation.
It is becoming increasingly common for councils in other jurisdictions to look
closely at the nature and performance requirements for the structure required to
get the best value out of a given activity, and put in place a structure which best
meets the requirements for that particular activity. This can be seen at its most
extensive in Europe where in virtually every European country, local authorities
will deliver some, and perhaps a significant amount of the services they produce
through arms-length entities, especially companies.
Two examples from surveys of the use of corporations within European local
government demonstrate just how extensive this practice has become. The first is
a review of practice in Germany and Italy from a 2008 publication, and the
second an overview of 25 European countries undertaken in 2004:

8. 7
Germany and Italy
[in Germany] the total amount of local corporations is estimated to be
around 4,000. While the average number of owned corporations in the
above mentioned sample is around twenty per municipality, large German
cities have nearly ninety companies, on average ….Italian cities own
around 2,000 corporations. According to the last Annual Report of
Confservizi (the Italian Association of Public Service Corporations), cities
with more than 50,000 inhabitants own almost 1,000 corporations. For all
municipalities, this is almost ten corporations per municipality, on
average. However, large Italian cities directly own twenty-five
corporations, on average (Confservizi 2006)7.
To give an idea of scale, the same publication looked at the proportion of
employees who worked for council corporations rather than directly for councils:
Germany: nearly 50 per cent of the municipal workforce is occupied by
Corporations. The share of personnel in corporations increases with the
size of the city.
Italy: nearly 30 per cent of the municipal workforce is occupied by
corporations.
The experience in both Germany and Italy needs to be qualified by recognising
that their local authorities undertake a broader range of activity than councils in
Australia. They are, for example, actively involved in energy distribution.
25 European countries
A 2004 survey8 undertaken by Dexia, at the time a leading specialist provider of
banking and finance services in the public sector in Europe, identifies a very large
number of local authority owned companies. In virtually all countries the number
of such companies was at least in the hundreds, and it was quite common for
there to be thousands of local authority owned companies within a single country.
Again this reflects the wider range of responsibilities undertaken by local
government in Europe as compared with Australia.
Rationale
Research into the experience from different jurisdictions highlights a number of
different reasons for using an arms-length entity as a means of undertaking
activity. Among the more common ones are:
 The ability to recruit people at a governance and management level with
specific high level skills relevant to the activity concerned. This can be
especially important at the governance level, attracting people who have
both the skills required and the commitment to putting back to the
community, but do not want to take on the full range of responsibilities of
an elected member.
7 See
http://www.researchgate.net/publication/233688459_Municipal_corporatization_in_Germany
_and_Italy
8 the survey can be accessed at http://www.lesepl.fr/pdf/carte_EPL_anglais.pdf

9. 8
 Creating an operating environment which is more appropriate to the
nature of the activity - this is related to but different from the next bullet
point and recognises that often the nature of the legislative requirements
for local government decision-making and accountability can impede
effective decision-making where local government processes are poorly
aligned with the requirements for effective and timely decision making
within the activity involved.
 Applying commercial disciplines to activities which are inherently
commercial whilst preserving democratic accountability. Possible examples
could include property development, managing/owning major vehicle and
equipment fleets, the management and/or ownership of significant
infrastructure, contracting services…
 Providing enhanced accountability and better oversight for significant
activities the performance of which might be difficult to identify separately
if embedded within core council. This requires careful design at the point
of establishment, and good understandings on the part of both elected
members and senior management within the council, and the members of
the governing body the entity.
 A convenient means of establishing major joint-venture activity (a recent
NSW example is the Kimbriki resource recovery Centre on Sydney’s
northern beaches).
 An alternative approach is the use of trusts where the potential for
charitable status (perhaps through using companies limited by guarantee)
can open up sources of funding not available to the council and again bring
in people with relevant skills, experience and community standing.
Other reasons can include a wish to avoid regulatory requirements which apply to
core council but not to council controlled entities. Some European countries, for
example, have far more favourable employment conditions for employees of the
core council than of council controlled entities. Transferring activities into an
arm’s entity has thus been a means by which a council has been able to
significantly reduce employment conditions. In Australia, although it might make
sense for an arms-length entity running a specific activity to have different terms
and conditions of employment than applied when the activity was part of core
council any such change should be by mutual agreement, and not imposed.
In Australia, the ability of councils to establish arms-length entities, especially
companies, varies significantly between different states ranging from virtually no
restrictions (Tasmania), to being allowed subject to ministerial approval (New
South Wales, Victoria beyond certain financial limits) to being prohibited (South
Australia and Western Australia where instead councils are allowed to form
entities referred to as regional subsidiaries but which lack many of the
characteristics of a truly commercial entity and appear unable to deliver the
benefits which councils in other jurisdictions have been able to obtain).
From my experience in New South Wales, there is not just a relative reluctance to
establish arms -length entities entities at least in the form of conventional limited
liability companies, but also a perception that doing so will be extremely difficult
because of the barrier presented by the requirement for ministerial approval. It
seems that the heart of the problem is a question of accountability arising from
the way in which the approval process necessarily operates. It is the Minister who
has the power to approve but it is the Minister’s advisers who will do the
background analysis and present the Minister with a recommendation. The issue

10. 9
this apparently raises is what happens if the Minister grants approval and the
company then gets into serious financial or other difficulty? Is the official likely to
be held accountable?
This goes back to the nature of the legislative provision itself. It deals purely with
the legal authority for a council to establish a company. There are no provisions
regarding post-establishment governance and monitoring to ensure appropriate
accountability back to the council or councils as owner. Effectively, councils are
left to rely on their powers under the corporations act which gives directors the
authority to run the business with very limited power for the owner to intervene
other than by dismissing the directors something which, in the case of a council
owned company, would look very like shutting the stable door long after the
horse had bolted.
Section 358 of the NSW Local Government Act 1993 provides:
(1) A council must not form or participate in the formation of a corporation
or other entity, or acquire a controlling interest in a corporation or other
entity, except:
(a) with the consent of the Minister and subject to such conditions, if
any, as the Minister may specify, or
(b) as provided by this Act.
(2) This section does not prevent a council from being a member of a
co-operative society or a company limited by guarantee and licensed not
to use the word “Limited” in its name.
(3) In applying for the Minister’s consent under subsection (1) (a), the
council is required to demonstrate, to the Minister’s satisfaction, that the
formation of, or the acquisition of the controlling interest in, the
corporation or entity is in the public interest.
What stands out in the section is not just the requirement for ministerial approval
but also the explicit statement that the section does not prevent a council from
being a member of a cooperative society or a company limited by guarantee. In
many respects, a company limited by guarantee c an deliver the same benefits in
terms of a different and more commercially focused operating environment as a
conventional company. This includes the presumption that activities undertaken
within a corporate framework should seek to generate a normal risk-related rate
of return.
From a purely practical perspective, a company limited by guarantee may be able
to deliver the same and indeed better outcomes for a local authority than a
company limited by share capital. Income generated by a company limited by
guarantee could be applied for purposes which met the local authority’s
objectives, and the company itself might also be able to achieve charitable status
depending on how those purposes were defined.
However, also from a practical perspective, companies limited by guarantee raise
exactly the same issues of risk, monitoring and accountability as companies
limited by share capital. In each case in the absence of suitable systems and
understandings there are risks such as political interference, companies being
driven to take undue risk in the pursuit of profit, councils treating them as cash
cows and effectively undermining their ability to reinvest in what may be quite
crucial community services, appointment of directors not because of their
inherent experience, skills and capability but for political reasons.
The need for an appropriate post-establishment regime was recognised in New
Zealand some 25 years ago as part of a major restructuring of New Zealand’s

11. 10
central and local government activities. The then government determined to
corporatise a number of its major trading activities. Because ministers wanted to
retain a significant measure of oversight, the government developed what has
become a quite robust post-establishment governance regime.
When it came to restructuring local government, it legislated for local authorities
also to be able to corporatise activity. In essence central government rolled out
over local government the same legislative framework, including the same
approach to post-establishment governance.
What were then called local authority trading enterprises but are now known as
council controlled organisations (as the regime was expanded to cover arms-
length entities other than companies) are required to operate in accordance with
what is known as a statement of intent. This is the key document in an annual
cycle of monitoring and accountability which begins with a letter of expectations
from the owner to the board of the company, discussion of the company’s
intentions for the next three financial years, and finally agreement on the
statement of intent itself. This is a comprehensive document which covers not
just conventional reporting metrics such as financial KPIs, but a range of other
material as well. To quote from the legislation:
A statement of intent must, to the extent that is appropriate given the
organisational form of the council-controlled organisation, specify for the
group comprising the council-controlled organisation and its subsidiaries (if
any), and
in respect of the financial year immediately following the financial year in
which it is required by clause 3(b) to be delivered and each of the
immediately following 2 financial years, the following information:
(a) the objectives of the group; and
(b) a statement of the board’s approach to governance of the group; and
(c) the nature and scope of the activities to be undertaken by the group;
and
(d) the ratio of consolidated shareholders’ funds to total assets, and the
definitions of those terms; and
(e) the accounting policies of the group; and
(f) the performance targets and other measures by which the performance
of the group may be judged in relation to its objectives; and
(g) an estimate of the amount or proportion of accumulated profits and
capital reserves that is intended to be distributed to the shareholders; and
(h) the kind of information to be provided to the shareholders by the
group during the course of those financial years, including the information
to be included in each half-yearly report (and, in particular, what
prospective
financial information is required and how it is to be presented); and
(i) the procedures to be followed before any member or the group
subscribes for, purchases, or otherwise acquires shares in any company or
other organisation; and
(j) any activities for which the board seeks compensation from any local
authority (whether or not the local authority has agreed to provide the
compensation); and
(k) the board’s estimate of the commercial value of the shareholders’
investment in the group and the manner in which, and the times at which,
that value is to be reassessed; and
(l) any other matters that are agreed by the shareholders and the board.
It’s comprehensive enough to ensure that KPIs are set to cover not just financial
and other conventional performance indicators, but also community related KPIs.

12. 11
Subparagraph (l) for example is sufficiently comprehensive so that a council could
require a council owned company to adopt quite comprehensive consultation
arrangements with the communities it serves.
In effect, the statement of intent (SOI) makes the New Zealand model primarily
an accountability model rather than just an efficient business model. It does
however require very good understanding both on the part of elected members
and senior management within councils, and on the part of people appointed to
the boards of companies of what is expected of each party. Directors, for
example, expect to be free to run the business in accordance with their own best
judgement. The statement of intent may significantly restrict what the company
may do. Directors need to understand that these restrictions are not inherently
interfering with the way they run the business, but rather setting boundaries
around what they may do (in much the same way, for example, as consent
conditions do in relation to environmental planning, mining permits and so on).
The good news, if you believe that a statement of intent approach is an essential
part of establishing effective monitoring and accountability for council owned
companies, is that this can be put in place by appropriate drafting of the
constitution of the entity - it does not need a legislative basis.
The SOI approach needs to be complemented by other best practice policies such
as appointment and remuneration of council appointed directors. This requires,
for example, recognising the potential for a conflict of interest if an elected
member is appointed as a director or trustee of a council controlled entity. It
effectively puts the elected member acting in that capacity in the position of
monitoring his or her performance as a director or trustee.
In summary, experience worldwide of the use of arms-length entities within local
government, especially in company form, points to the very real potential for
improving performance for activities which are best suited to that form.
The main caveat which councils should recognise is the need to understand the
governance and operational issues involved in managing the relationship between
the council and any company which it controls, and the very real risks if this is
not done well.
Experience also suggests that effective monitoring and accountability depends not
only on good understanding of both sides, but also on as having access to what is
quite sophisticated expertise. There is a real case for suggesting that rather than
councils attempting to develop their own monitoring and accountability capability
internally, this is better done as a ‘whole of sector’ service.
The role of good engagement
This is an area where community expectation appears to be moving well ahead of
public sector practice (at all tiers of government).
The public sector approach is very much around preparing a proposal and then
going out to the public to seek input. As we all know, the standard statutory
requirement is normally to put a document on exhibition for a month, invite
submissions, and give people an opportunity to be heard before the council.
To give councils in particular their due, practice is moving beyond this to
developing more flexible ways of gaining input. It’s now quite common for
councils to engage in extensive consultation around an issue, not just relying on
the statutory minimum. IAP2 has played an important role. So, in NSW, has the

13. 12
shift to integrated planning and reporting with its emphasis that the key council
document, the Community Strategic Plan, is actually the community’s document
setting out the community’s preferences and identifying who has the
responsibility for delivering what.
IPART’s emphasis on demonstrating community support when seeking a special
variation for a rates increase is also clearly having an influence.
Acknowledging all of that, a review of a number of Community Strategic Plans
shows that community engagement is still seen as being largely a one-off process
undertaken around the development of a particular planning document, rather
than a living process, or one which recognises that the community may have
interests in engaging with the council which may be different from the council’s
own agenda.
This is well illustrated by a blog post, from several years ago, by the general
manager of a Sydney area council commenting on the results of a ratepayer
survey inviting a ranking of council activities from the community perspective:
What has surprised the council about the survey results is the fact that
residents appear to be less concerned about what I would call the
‘traditional’ activities of local government – and much more interested in
what could loosely be termed participatory democracy. The survey findings
go on to say that out of ten drivers of satisfaction – what residents really
want – the top two were access to Council information and support and
community involvement in decision-making. Development came third,
domestic waste fourth and perhaps most surprising of all, maintaining
local roads came seventh.
This is consistent with international research on the changes taking place in the
way in which residents and ratepayers perceive their relationship with their
council and how they interact with it. Basically this been a shift from seeing the
primary interaction as through the electoral process, to a much more multifaceted
understanding with people seeing themselves variously as electors, as customers
(especially for a wide range of standardised services which local government
provides) to citizens when it comes to activities which have the potential to
impact on ‘their place.’9
It also reflects the reality that local government is often involved now in
developing initiatives whose effectiveness will depend at least in part on voluntary
behavioural change within their own communities. An interesting example from a
few years ago is public attitudes towards proposals to use recycled water to
supplement conventional potable water supplies. In 2006 Toowoomba in
Queensland faced the possibility that its potable water supply would run out. The
council proposed augmenting the water supply with recycled water. A referendum
promoted by citizens pushing the ‘yuk’ factor as a major objection was successful
in defeating the proposal despite the council putting forward scientific evidence
that there would be no health risk.
9 for an overview of recent research see Schaap, L. et al. 2009, Innovations in
Sub-National Government in Europe, Netherlands' Council for Public
Administration, viewed February 2011, www.rfv.nl/GetFile.aspx?id=903 and
Haus, M. & Sweeting, D. 2006, ‘Local Democracy and Political Leadership:
Drawing a Map’, Political Studies, vol. 54, pp. 267-288.
www.sparc.bc.ca/.../doc/358-local-democracy-and-political-leadership.pdf

14. 13
A year previously, the CSIRO had released findings from a substantial research
project “designed to systematically investigate, identify, measure and test the
major factors that govern people’s decisions about whether to use recycled water
for different uses or whether to reject the schemes.” (Po et al 2005)10
Interestingly, the project found that knowledge did not emerge as a factor in
people’s decisions on whether to accept recycled water, strongly suggesting that
relying on education and information programmes (as with Toowoomba) was
basically irrelevant other than as part of a process of building trust in the
sponsoring institution. Instead, the research concluded “Past international
experience and the results of this research support the need for authorities to
start talking with communities early in the planning phases of recycling schemes.
It is essential for trust to be developed and this will only occur through a genuine
partnership with the community where their concerns are listened to and
addressed to their satisfaction. There will be no short cuts available given the
influence of emotions and “others”.
Essentially, the CSIRO research supports the view that there are now a number of
matters confronting local government where the ‘licence to operate’ depends not
just on having good evidence about the desirability of what is proposed, but also
on developing an active partnership with the community to share in making the
decision to proceed . It’s likely that this will become a more significant part of
local government’s role, not just in terms of projects which local government
itself may be seeking to implement, but also in building public support for
initiatives which higher tiers of government may wish to take within the
community. 11
It’s now quite common for issues of engagement between councils and their
communities to be seen in terms of “I do not want to be consulted on the
council’s answer to the council’s question, I want to be involved in deciding what
the question should be”. This is an approach which suggests a shift from treating
consultation or engagement as being around a single issue, with an engagement
strategy developed to handle that issue, to treating consultation or engagement
as an on-going dialogue between the council and its communities.
Doing this requires more than just designated people within the council whose
role is to manage engagement, ideally supported by empathetic elected
members. It actually requires some form of ‘soft infrastructure’ within the
community itself.
This is an approach which a number of councils, especially in North America, have
developed partly as a way of managing engagement between councils and their
communities, and partly as a way of building community capability. As an
example, the city of Portland in Oregon supports a network of approximately 100
resilient neighbourhood associations most of which are geographically based but
some of which are now much more community of interest based, especially in
working with Portland’s growing ethnic communities.
10 Po, M., et al (2005). Predicting Community Behaviour in Relation to Wastewater Reuse : What
drives decisions to accept or reject ? Water for a Healthy Country National Research Flagship. CSIRO
Land and Water Perth. Accessed at:
http://www.clw.csiro.au/publications/consultancy/2005/WfHC_Predicting_Reuse_Behaviour.pdf
11 In a keynote address to the 2011 National Congress of Local Government Managers Australia, the
Infrastructure Coordinator for Infrastructure Australia observed that one of his reasons for accepting
the invitation to speak was that government needed local government to help establish the mandate
for undertaking major works because local government was much closer to its communities than
government.

15. 14
It’s an approach which is seen as a worthwhile investment in building the
council’s ‘licence to operate’ - building trust between the council and its
communities that the council genuinely has the communities’ interests at heart.
Just how important this has become was illustrated recently when a new
superintendent was appointed to oversee the city’s school system. She was
appointed from a very different part of the United States where a t op-down
approach to decision-making was still very much in vogue. This approach led to
significant conflict within the school system and ultimately the resignation of the
new superintendent. The local paper, reporting on this, commented that the new
superintendent simply didn’t understand the ‘Portland way’12.
Sometimes, the best way to engage is actually to delegate authority to
communities so that they are able to take their own decisions. This can be
particularly useful on sensitive issues where there is likely to be local opposition if
council tries to impose a decision. In New Zealand the Thames-Coromandel
District Council which is the local authority for the Coromandel peninsular, a very
popular holiday destination, leads New Zealand in empowering community boards
(elected sub-council bodies) to undertake local decision-making.
It’s produced examples of decisions which the council itself would not have been
able to take and impose because of local resistance - community ownership of the
decision has made it possible to do what the council by itself could not. As two
examples:
 Hot Water Beach uses revenue from paid car parking to support a fund to
manage tourism infrastructure development in that area.
 Capital expenditure for Whitianga boat ramp facilities is being paid for
from boat ramp fees which will then be used to pay for other
harbour/boating facilities.
In Australia there have been a number of worthwhile initiatives at a local level
designed to enhance community engagement and give councils bet ter information
on community priorities as well as often to enhance co-production - enabling the
council to draw on resources within the community, or which can be accessed by
the community but may not be available to the council itself. Community planning
in the State of Victoria has produced some excellent examples perhaps the best
known of which is the Shire of Golden Plains which sustains community planning
12 for some detailed background on how the City of Portland has approached neighbourhood
engagement over the years view these resources:
• Public Involvement Principles: www.portlandoregon.gov/oni/article/312804
• Public Involvement Assessment Toolkit (Guide to help City government staff think
through when they need to involve the community, the level of engagement that is
appropriate, and appropriate tools and strategies.):
www.portlandonline.com/shared/cfm/image.cfm?id=137141
• visionPDX Community Engagement Report (Report that describes very innovative
community engagement strategies used to involve historically underrepresented communities
during Portland’s city-wide visioning process.):
www.visionpdx.com/reading/engagementreport.pdf
• Community Connect: Five-year Plan to Increase Community Involvement (Important
review of Portland’s neighborhood and community engagement system that led to major
system reforms.): www.portlandoregon.gov/oni/article/182408
• Public Involvement Advisory Council (PIAC) (Formal City commission charged with
developing standards, guidelines and resources to improve the quality and consistency of City
government community involvement.): www.portlandoregon.gov/oni/48951
• Office of Neighborhood Involvement (ONI): www.portlandoregon.gov/oni/25967

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groups in more than 20 small townships across the Shire13. The city of Swan in
Western Australia has pioneered a place based approach to management,
working through a number of area offices and redesigning its organisational
structure so that when residents come to discuss something which concerns
them, they can get a ‘whole of issue’ response. As an example, if someone comes
with an issue about a street they don’t just get a traffic engineer response about
traffic but are able to discuss other related issues including street furniture,
maintenance and so on.
Looking more generally at the role of communities, it’s clear that there is a lot of
local knowledge communities hold about facilities, resources and needs in their
area which is not readily available to councils. This may range from where to put
the bus stops on a new bus route (a recent Melbourne area example where an
engineer’s recognition that the community needed to be involved in decision-
making saved the council from a very expensive mistake), to what service level
standards the community is prepared to pay for.
Interestingly, it’s often the engineers, or rather the programs for which they are
responsible, which stand to benefit most from good on-going engagement. Even
the best asset management plans tend to be based on standard rules and
standard understandings of service levels and when to undertake maintenance or
renewal work. There are plenty of examples of communities stating that they are
prepared to accept a lesser service level, or pointing out that the street surface in
a little used cul-de-sac does not need to be resealed as frequently as the asset
management plan might indicate.
From a financial sustainability perspective, effective community engagement
needs to be seen as one of the best available tools for managing requirements for
expenditure especially in asset maintenance or renewal, and in setting service
levels. It does need though to be done on the basis of developing an on-going
dialogue, rather than treating engagement as something you do around a
particular issue. One of the most important reasons for this is building up
relationships which will underpin trust, confidence and understanding between
the council and its communities. The last thing you want to do is to re-educate
communities (and council staff) each time you need to go through an
engagement process.
Conclusion
Financial sustainability is an increasingly important issue within local government
not just in Australian states but elsewhere as public sectors worldwide come
under increasing fiscal pressure. Among the questions for local government to
consider are whether financial sustainability should be considered as a council
issue or community issue. This presentation has argued that the crucial issue is
the sustainability of the community and that in essence the financial sustainability
of the council will flow from whether the community itself is financially
sustainable given the mix of and funding for services currently provided by all
three tiers of government.
It has gone on to argue that today’s environment requires councils to understand
the crucial difference between provision and production and to be prepared to
look very closely at how services are delivered and by whom, including the use of
arms-length entities. In an age in which councils are and will continue to be
13 see the ACELG publication, Evolution in Community Governance: Building on
What Works available at http://www.acelg.org.au/system/files/publication-
documents/1335499377_Vol1_Community_Governance_20_April_2012.pdf

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financially constrained, it’s obviously crucial not just to be good at cost-cutting or
putting efficient practices in place within core council, but to be very good at
knowing and being able to implement the best means of delivery for each service
including the potential for arms-length entities to contribute significant
efficiencies and bring in new skills.
Finally, a brief overview has been provided of the importance of engagement in
supporting good council decision-making and building legitimacy. This is a topic
on which much more could be said including the need to understand the
difference between being elected as a representative to take decisions (thereby
inherently ruling out the community’s knowledge and experience as being of any
particular value) and being elected as a community leader with the role of
facilitating decision-making in the best interests of the community.