The fate of many of Sydney's councils will be handed over to the independent pricing watchdog, which will determine whether they successfully argue their case either for or against merging.
Local Government Minister Paul Toole announced the Independent Pricing and Regulatory Tribunal (IPART) will act as the "expert advisory panel" set out in the state government's plan to reduce the number of NSW councils.
IPART has been tasked with considering a range of criteria, including whether a future council had "the scale and capacity to engage effectively across community, industry and government".
Under the government's "Fit for the Future" program, many metropolitan councils have been set a "scale" target of about 250,000 residents.
Sydney's smallest councils - those with fewer than 40,000 residents, such as Mosman, Lane Cove, Strathfield and Hunters Hill - also count among those most staunchly opposed to amalgamating.
Councils, which stand to gain millions of dollars in financial incentives if they amalgamate voluntarily, have until the end of June to put forward their preferred merger option or to justify why they should not be required to do so.
The state government has not ruled out forcing mergers between those who refuse to nominate changes.
But it has handed over the responsibility for making a decision about each council's proposal to IPART, which will develop a methodology for assessing the written submissions before delivering its recommendations to the state government.
Mr Toole said he was confident IPART would perform the role "transparently and effectively".
"Councils and communities deserve these proposals to be considered independently, and assessed with consistency, fairness and impartiality," Mr Toole said.
IPART would also be required to consider whether a proposal is sustainable, efficient, and "effectively manages infrastructure and delivers services for communities".
The terms of reference were developed in consultation with representatives from industry bodies and unions, the government said.
Local Government NSW president Keith Rhoades was "lukewarm" about IPART's role in the process, adding that he would rather have seen a panel comprised of a mix of government appointees and those from the local government sector.
"Could have been better, that way. Could have been worse, too," said Cr Rhoades, who declined to comment on the implications of IPART's assessment criteria on Sydney's councils before the June deadline for submissions.
Mr Toole said NSW needed councils to be "financially sustainable and able to deliver efficient and effective services".
"We need a sustainable system of local government – one that provides quality services and infrastructure and will help us to deliver downward pressure on rates, better services and more infrastructure," Mr Toole said.
An Independent Local Government Review Panel report commissioned by the state government said Sydney's councils should be "significantly reduced" from 41 to between 15 and 18.
Premier Mike Baird urged a gathering of the state's councils last year to consider boundary changes, telling them that the status quo was "not sustainable".
