Economies of Scale as Reason for Merging LGUs

[Glen Wright]

The rationale for merging local government units in order to achieve economies of scale in service delivery comes being used, even though the research doesn't show any evidence that this really works.  Recently, Albania merged their 360 units into 61 units with the belief that this would achieve economies of scale and save money. They did this without undertaking any costing study of service delivery and what the saving would be achieved.  Even worse, they assumed that there would not be any costs of doing this merger.  Little realizing that there are enormous costs associated with personnel, systems, and assets to be merged. 

I attach two studies, one from WB from some year ago, and a more recent analysis from Hungary that demonstrates that economies of scale are not realized, or only in limited situations.

I would be interested to hear from any colleagues that have some studies that support the economies of scale argument for merging local government units based on well researched and comprehensive analysis.

[John Short]

There have been various attempts at efficiency gains in the UK with local authorities sharing some functions. http://www.local.gov.uk might be a good source of information

http://www.local.gov.uk/peer-challenge reports on one particular initiative.

[FitzFord]

Glen,

I don't have data on the benefits of amalgamating smaller units to create larger ones. How about looking at the effects of creating smaller units from larger ones? I am not sure of this example, but Uganda created a reasonably successful decentralized system that was apparently wounded by making the units smaller. It may highlight if, and where, any efficiencies were lost. If so, it may indicate where to hypothesize areas of less efficiency.

Fitz.

[Glen Wright]

Fitz:  Yes, this would be an interesting situation to examine.  I have been working in Georgia over the past year and they have initiated a process of demerging the 70 some LGUs into a larger number, estimates range from 150 to 300 possibly.  There was a study done to estimate the cost of this demerging by USAID. I attach.  According to this, the demerging would be very costly and the MoF in Georgia is quite opposed to this whole scheme.  So, it is quite a political issue there.