Efficiency of local governments in Malaysia

Abstract

This study examines the performance of local governments (City Councils, Municipal Councils and District Councils) in Malaysia in terms of their governance efficiency. Two primary research objectives are developed. The first research objective focuses on measuring the efficiency of Malaysian local governments in terms of (i) technical, (ii) pure and (iii) scale efficiency, while the second research objective is to examine the factors influencing the efficiency of Malaysian local governments. The study covers 35 local governments in Malaysia. The relevant data are obtained from local governments’ financial statements over the period between 2008-2015. For the first research objective, i.e. measuring efficiency, the Data Envelopment Analysis (DEA) is used. Based on an input orientation DEA, the efficiency scores are calculated using three inputs (tax revenues, fees and charges, subsidies from central government) and four outputs (net book value of land and buildings, net book value of motor vehicles, net book value of equipment and fittings, cost of goods and services). The results show that different local governments have different levels of efficiency. Generally, most Malaysian local governments recorded high technical efficiency (TE), pure technical efficiency (PTE) and scale efficiency (SE) with above 0.90 mean scores. The efficiency trend in the eight year period of study fluctuates, with the highest scores recorded in 2011 and the lowest scores in 2008. The study also reveals that for most local governments, the SE is lower than the PTE, which indicates that SE have been the main contributor to lower overall efficiency (or the TE) for these local governments. Next, for the second research objective of examining the factors influencing the efficiency scores, the result of the DEA efficiency scores obtained are regressed against five factors, namely population size, population density, economic independence, dependency on tax revenue and value of assets. From these factors, only four factors are found to be significantly associated with the Malaysian local governments’ efficiency. The study found positive and significant relationship for the population size (DUMPOP), economic independence (OWREV) and the value of assets (ASSETS) where the population size is found to be influencing the PTE scores, while the economic independence is found to be influencing the TE and SE scores and the value of assets is found to be influencing the PTE scores. A negative and significant relationship is found between the dependence on tax revenue (TXREV) with the TE, PTE and the SE scores. The result of the study provides information useful to relevant authorities in improving the performance of Malaysian local governments, specifically in terms of efficiency.