1. The Unique and Mixed Business of Local Government

1.1 Size and scope of local government

How many companies have a span of businesses as wide as construction services, gardening, planning, waste disposal, recreation and culture, sports, infrastructure maintenance and delivery of essential services?

Government tends to get the activities that don't fit into the private sector. As Herman Leonard, Professor of Accounting at the Kennedy School, Harvard University, has said "the hard jobs are left to the public sector".

In Australia the hardest of the hard jobs tend to get passed on to local government. They often pick up the functions that don't fit into the other tiers of government.

Local Government is big business, but how big? At first sight local government isn't large compared with the other tiers of government; it accounts for less than ten percent of total government outlays in Australia.

But such appearances are deceptive. Local government, unlike the Commonwealth, is a major provider of services and a major provider of infrastructure. The Commonwealth's figures are inflated by large transfer payments to individuals (pensions and allowances). In addition a large part of Commonwealth outlays is accounted for by interest on accumulated debt and subsidies to industry. What is left after these activities are excluded is the core of government business which requires administration - capital works and direct service delivery. If financial transactions such as transfers and subsidies are left out of the base, because they require less administration than directs service delivery, then local government's share of outlays is closer to 20 percent of total. This is a better indicator of government activity than crude outlay data.

If capital outlays are presented separately, then the relative role of local government is even more prominent.

This has management implications, for while other tiers of government may be more involved in management of ongoing programs, project management is relatively more important in local government.

The range of local government functions is also very wide. While the Commonwealth's own-purpose outlays are dominated by defence and health care, and the states' outlays are dominated by health and education, local government has a very wide range of activities with no simple unifying theme.

This means local government has a very distinct role in economic and financial management. It does not have to take on the role of economic stabilization; that is mainly a task for the Commonwealth. Nor is it involved in funding welfare, although it is becoming increasingly involved in delivering welfare services. But it does have a strong role in capital expenditure, and it does have a wide range of services to deliver, some on a commercial or near-commercial basis (trash collection, water), some on a heavily subsidised basis (recreation, culture), and some as public goods (roads, parks). It also shares with other tiers of government a strong regulatory role in areas such as planning and food service.

Because of the importance of capital works, proper capital accounting and project assessment are very important aspects of local government administration. The other distinct feature of local government is that it has a long tradition both of operating its own businesses and of contracting out services. This handbook therefore gives some prominence to project evaluation and to contracting out.

1.2 One size does not fit all

It is a popular misconception that there is one "best" management practice, and that this is to be found in the private sector. While such dogma glosses over the huge range of private sector management practices, it also glosses over the substantial and enduring differences between the public and public sectors. The table below highlights those differences which have some effect on financial management.

Within local government there are significant differences between various activities. The financial management of capital intensive operations such as roads and water supply is very different from the financial management of labour intensive services such as community services. Libraries and art galleries may be able to mobilize volunteer resources, sewerage and street lighting have a more difficult task encouraging volunteer input. Water can be provided on a user pay-basis; street lighting is a classic "public good".

These differences do not negate the shared interest each sector has in efficient management, in putting scarce resources to their best use, in creating wealth and generally accounting to stakeholders. The way they achieve these broad objectives differ, however.

A distinct feature of local government, by very definition, is its closeness to its constituents. Elected representatives are known in the community. Services are delivered in a contained region. Flexibility and quick decision-making are often called for. Not many Canberra bureaucrats have to call out a work gang at 4 am to fix a burst water main and to authorize emergency repairs.

Given this range of functions, it is not reasonable to expect that there is one proper path to sound financial management in local government. This handbook covers some techniques in financial management, but above all it stresses the need for elected representatives, managers and professionals to use their discretion and to make informed judgements rather than to seek some programmed "hands off" decision-making mechanisms.

The prime need is to develop a clear understanding of the need for a distinct culture of management accounting, a point to which we turn in the next chapter.

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