Municipal Performance in a Network Structure of Financial Operations and Service Provision in the New South Wales Local Government

Whereas the bulk of empirical research has employed nonparametric approaches to estimate efficiency in local government, especially Data Envelopment Analysis (DEA), in this paper we employ a Network DEA (NDEA) model to investigate the impact of the separate divisions of financial management and service provision on overall municipal efficiency. We apply this approach to the New South Wales (NSW) state local government system in Australia using a NDEA model for the four-year period of 2014/15 to 2017/18. We find that the overall efficiency of NSW local councils is statistically significantly associated with financial efficiency more strongly than with service efficiency, indicating that financial activities are relatively more important in terms of municipal performance. Using a fractional regression model in a second-stage NDEA model, we also establish that urban local councils are more efficient than their rural counterparts in terms of both financial efficiency and overall network efficiency.