Evaluating local government performance in times of crisis

ABSTRACT

In recent years, Spanish local governments have come under increasing pressure to accommodate severe economic restrictions while maintaining their provision of local public services. We analyse overall cost efficiency in Spanish local governments during the period of the economic crisis (2008–2013), under four different non-parametric methodologies. Moreover, given how problematic it is to precisely define what municipalities do, we compare three different output models with various measures of quantity as well as quality. Results suggest that Spanish local government efficiency improved over the period 2008–2013 since budget expenditures (inputs) fell while local public services and facilities (outputs) were maintained. We also find evidence of the possible implications of service quality when measuring municipalities’ efficiency, and of structural differences in the average efficiency between municipalities located in different Spanish regions. Finally, our results confirm that the level and variation of efficiency scores are affected by the approach taken.

KEYWORDS:

• Efficiency
• local government
• non-parametric frontiers

Acknowledgments

The authors thank Paula Bel, Víctor Giménez, Diego Prior and José Luis Zafra for helpful comments. The authors also thank the three anonymous reviewers whose comments contributed to an overall improvement of the paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. In 2013, the SGP was reformed through a collection of new laws, known as the ‘Six Pack’. It laid down detailed rules for national budgets to ensure EU governments respect the requirements of economic and monetary union and do not run excessive deficits. In 2014 the SGP was further strengthened by new laws, known as the ‘Two Pack’, as well as budgetary targets set by the European Fiscal Compact. Taken from the History of the Stability and Growth Pact (SGP), https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/stability-and-growth-pact/history- stability-and-growth-pact. Last accessed 23.3.17.

2. In 2007 the construction sector represented 13% of Spain’s gross domestic product (GDP). Low interest rates and the expansion of the Spanish savings banks (Cajas de Ahorros) substantially contributed to a construction boom that turned into a ‘bubble’, which burst when borrowing was severely curtailed after the fall of Lehman Brothers in 2008 (Almendral 2013).

3. Ley General Estabilidad Presupuestaria (2007,2012), or Law on Budgetary Stability.

4. Despite the difficulties of implementing these approaches in real-world processes, several initiatives are available for this purpose. For instance, as indicated by Badunenko, Henderson, and Kumbhakar (2012), the German regulator (the Federal Network Agency) initiated a program in which the 850 electricity and 730 gas companies (in 2009) were obliged to participate to measure their relative performance – i.e., their efficiency. The rationale for this programme was that failure to penalise inefficient firms had potentially large economic effects. Both Stochastic Frontier Analysis (SFA) and Data Envelopment Analysis (DEA) were used in this analysis, and for each firm the method that revealed the highest efficiency level was chosen. In the specific case of local governments, the ‘Departamento Nacional de Planeación’ in Colombia (DNP, National Department of Planning) also applies DEA to measure the efficiency of Colombian municipalities. Therefore, although implementing these approaches in real-world process is complex, we consider the challenge might be worth taking up for several reasons – including, importantly, potential economic gains.

5. The General State Comptroller (Intervencioón General de La Administración del Estado, IGAE) is a public institution which depend on the Spanish Ministry of the Treasury and Public Administrations (Ministerio de Hacienda y Administraciones Públicas).

6. For a comprehensive literature review on efficiency measurement in local governments see Narbón-Perpiñá and De Witte (2018a, 2018b).

7. Data from INE (Instituto Nacional de Estadística, Spanish Statistical Office), January 2011.

8. Regional governments have been gaining powers at the expense of central government at a greater rate than local governments (see, Balaguer-Coll, Prior, and Tortosa-Ausina 2007, 2010).

9. See Coelli et al. (2005) and Fried, Lovell, and Schmidt (2008) for an introduction to efficiency measurement.

10. Cost Efficiency (CE) = Technical Efficiency (TE) x Allocative Efficiency (AE).

11. For a detailed review of the main differences between parametric and non-parametric frontier techniques, see Murillo-Zamorano (2004) and Bogetoft and Otto (2010).

12. We consider using several techniques has the advantage of making the results more robust, and it is particularly interesting in the context of efficiency analysis in the public sector, in which several options are available and practitioners might end up overwhelmed by the existence of multiple techniques (Badunenko, Henderson, and Kumbhakar 2012). We are also aware that other options are available in the parametric field, as pointed out by one of the reviewers, but adding this approach to the study would make the results unmanageable and the paper too long.

13. As Daraio and Simar (2007) note, the ‘curse of dimensionality’ implies that an increase in the number of inputs or outputs, or a decrease in the sample under analysis (i.e., the number of units for comparison), entails higher efficiencies.

14. The Basque Country and Navarre are not obliged to present this information to the Spanish Ministry of the Treasury and Public Administrations because they have their own autonomous systems and are therefore not included in the State Economic Cooperation.

15. There are some additional problems when defining inputs and outputs due to the lack of cost accounting at the municipal level, which would facilitate more accurate estimation of public administration efficiency. However, given this limitation, as we shall see below, municipal budgets must be used as inputs, and the services provided (along with data on infrastructures and some proxies) as outputs. Another challenge is represented by the expenditures that could be moved to the financial sphere of municipalities. There is a specific literature stream (outsourcing) dealing with this issue (see, for instance González-Gómez, Picazo-Tadeo, and Guardiola 2011).

16. Articles 25 to 28 of this law were amended in 2013Ley 27/2013, de 27 de diciembre, de racionalización y sostenibilidad de La Administración Local to clarify municipal powers, rationalise local government organisational structure in accordance with the principles of efficiency, stability and financial sustainability, and ensure more rigorous financial and budgetary control.

17. Although municipalities are obliged to provide a different bundle of services of infrastructures depending on their relative populations, some of them go beyond the legal minimum and actually provide more services and infrastructures than those stipulated by law. Several reports, including Vilalta and Mas (2006) and research papers (Balaguer-Coll, Prior, and Tortosa-Ausina 2013) have acknowledged this fact. This is referred to as the ‘gasto no obligatorio’ or ‘gastos impropios’, i.e., non-compulsory expenses in which municipalities incur for a variety of reasons. Although this is an interesting issue and merits specific investigation (such as Balaguer-Coll, Prior, and Tortosa-Ausina 2013), it goes beyond the aims of this paper.

18. Although the number of output variables is relatively high compared with previous literature, we have, in general, a more complete and much larger database. We have data available containing the services that municipalities must provide and measures of their quality, including several Spanish regions for several years.

19. The information available on the quality of the services is of a categorical nature. Thus, although there may be alternative definitions to measure the quality of output measures (such as including a separate variable with information on quality), our procedure (i.e., quality weighted by quantity) allows keeping the number of outputs constant when comparing models 2 and 3.

20. Different definitions can be applied to include service quality. Indeed, the studies of Balaguer-Coll, Prior, and Tortosa-Ausina (2007), Balaguer-Coll and Prior (2009) and Zafra-Gómez and Muñiz-Pérez (2010) included service quality as a single output variable. However, since we aim to compare the efficiency scores with and without including service quality in the analysis, we consider it appropriate to weight the quality of each service by its quantity in order to maintain the same number of variables as output Model 2.

21. Simar and Zelenyuk (2006) adapted the Li (1996) test when applied to efficiency scores yielded by DEA and FDH via bootstrapping techniques.

22. Report from the Spanish Ministry of the Treasury and Public Administrations (Ministerio de Hacienda y Administraciones Públicas), July 2014. ‘Informe sobre la dimensión territorial de la actuación de las Administraciones Públicas, Ejercicio 2011’. Retrieved from http://www.minhafp.gob.es.

23. For the sake of simplicity, we focus the analysis on output Model 3 (note that we found statistical evidence of the possible implications of service quality when measuring local government cost efficiency.) However, qualitative results for output Models 1 and 2 are not greatly different and are available upon request.

24. Kruskal–Wallis test is the nonparametric alternative to the one-way ANOVA.

Additional information

Funding

This work was supported by the Generalitat Valenciana [grant number PROMETEOII/2014/046]; Ministerio de Economía y Competitividad [grant numbers ECO2014-55221-P and ECO2017-85746-P] and Universitat Jaume I [grant number P1.1B2014-17].

Notes on contributors

Isabel Narbón-Perpiñá

Isabel Narbón-Perpiñá is part of the technical research team at the Instituto Valenciano de Investigaciones Económicas (Ivie), Spain, where she specializes in public economics in general and the analysis of local government performance in particular. She has published in specialized journals such as International Transactions in Operational Research.

Maria Balaguer-Coll

Maria Balaguer-Coll is an associate professor of finance and accounting at the Universitat Jaume I, Spain. Her research focuses on local government finance. She has published in journals such as European Economic Review, International Public Management Journal, Annals of Regional Science, Journal of Productivity Analysis, Environment and Planning A, Spanish Accounting Review, Applied Economics and European Journal of Political Economy.

Emili Tortosa-Ausina

Emili Tortosa-Ausina is Professor of Applied Economics at the Universitat Jaume I, Spain. His main fields of research are efficiency and productivity analysis, banking and finance, and regional and urban economics. He has published several books and articles in journals, including European Economic Review, Economic Geography, Environment and Planning A, Journal of Banking and Finance, World Development, and Journal of Economic Behavior and Organization.