No Aladdin’s cave in New South Wales? Local government amalgamation, scale economies, and data envelopment analysis specification

Local government structural reform programs are often based on the purported benefits of increased scale. We examine this question in relation to the proposed amalgamation program for New South Wales (NSW) by the NSW Independent Local Government Review Panel using Data Envelopment Analysis (DEA). We find evidence that a significant proportion of municipalities scheduled for amalgamation already exceed optimal scale and that the great majority of “amalgamated” entities will initially exhibit decreasing returns to scale. Our findings thus stand in stark contrast to the Independent Local Government Review Panel (ILGRP) contention that municipal mergers are the optimal approach to capturing economies of scale in NSW local government.