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19.2.2016 Is past behaviour an indicator of future performance? Weekender Column 100


I thought I might put my hand up for the Indian Premier League (IPL) this year. I could put together a pretty good document telling the franchises about the wonderful feats I could perform for them if they secured my services in the auction. The highest paid player in the tournament this year will be Shane Watson. He was signed by Royal Challengers Bangalore for Rs 9.5 crore (AU$1.98 million).

So why would a team pay that amount for Shane when, despite my incredible desktop publishing skills and promises of performance, I don’t think I would have received a bid for my services.

There is one simple reason. In any aspect of life, we assume that the best indicator for future behaviour is past performance. Amongst all players that have played a reasonable number of T20 internationals, Shane has the 2nd best batting strike rate; the 9th best batting average; the 3rd highest number of sixes; the 2nd highest outright score and to show his versatility he is number 24 on the list of wicket takers and number 28 on the list of catchers. Throw in the IPL Most Valuable Player tag from 2008 and 2013 and the past performance resume is pretty impressive.

Is any of this a guarantee that Shane will perform better than me in the IPL? There are no guarantees, but I would say this resume is a very strong indicator that his future performances will be similarly impressive.

In every aspect of life, we make decisions for the future based on what has happened in the past. Employees typically gain employment and promotion based on what they have achieved in the past. Businesses are bought based on past performances typically by way of a Profit and Loss report. Sporting teams are selected on past performances.

This all seems obvious and logical but there is a crucial area that all of these rules of logic appear to have been thrown out the window.

Amalgamations.

With so many proposed amalgamations across the State at the moment, with glossy brochures created by high-paid consultancy firms such as KPMG, it would be assumed that there had been extensive research performed on the success of previous amalgamations. After all, the rest of society seems to predict what will happen in the future based on what has happened in the past, it would make sense to look at previous amalgamations.

Around the turn of the century, we had 5 amalgamations in this State and then in 2004 we had another 22 amalgamations. For the sake of calculations, I will call it 26 amalgamations because Pristine Waters was formed in 2001 but it was then absorbed in a further amalgamation with Clarence Valley Council in 2004. Probably the shortest Council existence in our history! So with a total of 26 amalgamations stretching back 12 to 16 years, surely there is enough evidence and history to draw some conclusions on the success of amalgamations.

I will examine three components. The IPART declarations of being Fit for the Future; population changes and rate increases.

We will start with IPART declarations. Of the 26 amalgamated Councils, 7 were declared Fit. On that count, 26.9 per cent of Councils amalgamated since the turn of the century are Fit for the Future. Not a great start.

We read about the promise of improving ‘scale and capacity’ after an amalgamation. That translates to increasing population numbers in various towns involved. Does this promise have some merit?

I broke up the 26 amalgamated areas into 64 towns from these areas and looked at the population changes for those areas from the 2001 census to the 2011 census. During this time the average annual population growth across the State was 0.96 per cent. How did the 64 towns fare compared to the average growth across the State? 75 per cent of towns grew slower than the State average. If you remove the two large Sydney based Councils (Canada Bay Council and City of Sydney Council) then the percentage of growth below the State average for the other 24 amalgamated areas increases to 78.9 per cent.

What about if we go a step further? If we look at how many of the 64 towns experienced a decline in actual population over that ten year period, we find an incredible 35.9 per cent of towns in amalgamated areas experienced negative population growth. Not exactly a glowing endorsement for increasing population. Some of these declines were quite significant. Glenn Innes merged in 2004 and experienced 0.94 per cent annual decline. Eglinton – part of Bathurst Regional Council – saw an annual decline of 1.44 per cent. Armidale declined at 0.12 per cent annually. Cooma fell away by 0.89 per cent each year. Coonabarabran; Gulgong; Lavington; Maclean – the list goes on of locations to experience negative growth since their amalgamations. Remember this isn’t just growth below the State average – this is the population declining in outright numbers.

So far the past performances don’t look great. Only 26.9 per cent of amalgamated Councils are Fit and only 25 per cent experience population growth better than average.

Supposedly then all the benefits are going to be financial. The merger proposals make incredible claims of billions of dollars that will be saved and I have heard the term a thousand times of “downward pressure on rates.” If these claims are true then we would see evidence of these 26 amalgamated Councils lowering rates – or at the very least not going above rate-pegging amounts (for simplicity, rate-pegging can be thought of as CPI increases).

It is probably going to come as no surprise to you but this simply isn’t the case. It took some time for the Office of Local Government to be forthcoming with this data and it was only received just before going to press but of the 26 amalgamated Council areas, a total of 20 of these have applied for an additional rate increase over and above the rate-pegging amount since their amalgamation. Some have applied multiple times in the course of their amalgamated lives. Richmond Valley applied for increases of over 70 per cent; Palerang was almost 60 per cent; Tamworth and Gwydir were both over 38 per cent and Clarence Valley was over 37 per cent. On average, the applications that were made across the 20 Councils were for more than 30 per cent per Council. So make that 76.9 per cent of amalgamated Councils have applied for additional rate increases.

I am not sure which way you can read that to mean “downward pressure on rates” but it certainly doesn’t look like anything but residents in an amalgamated Council area should expect rate rises. Each specific merger document has a quote from the Minister for Local Government that says that a merger will provide many benefits to communities including “potentially reducing the reliance on rate increases through Special Rate Variations (SRVs) to fund local infrastructure” which seems directly at odds with the past data. As an example, the most recent Clarence Valley Council SRV application states that the “increase of the special variation is 37%” and “The increased rate revenue above the rate peg amount for each year to be specifically used to repair Council roads and road-related infrastructure…” It doesn’t seem to even closely match the words from the Government.

I will let the facts speak for themselves. The past performance shows the three indicators as being bad for amalgamated Councils yet the merger proposal documents talk of the wonderful benefits of amalgamations. Something seems amiss here.

Maybe I should ask KPMG to write my application for the IPL next year?

#NoDubbington