Financial mismanagement and efficiency trade-off in local municipalities: Lessons from Eastern Cape, South Africa

Abstract

Background: Local governments are considered an essential part of interpreting and integrating laws and policies at the local level. There is a growing realisation that the success of local government is vital to alleviating poverty and delivering services to communities. However, financial mismanagement as per audit reports has affected a number of local authorities and continues to be a hindrance to progress.Aim: This study was set to investigate the level of efficiency in each municipality and how financial mismanagement (unauthorised, irregular, fruitless and wasteful expenditure) influences that efficiency.Setting: The study considered all local municipalities within the Eastern Cape province of South Africa, using publicly available data on each municipality’s performance and financial management. The data available and utilised are for the financial years 2012–2015.Methods: The study used a non-parametric linear programming-based technique to compute efficiencies, with the local municipality being the decision-making unit. The implications of financial mismanagement on efficiency are determined in a second-stage regression model with the use of panel tobit regression.Results: We found that the mean efficiency ranges between 0.407 (moderate) and 0.724 (high) in general, however, with greater variation across municipalities. Fruitless and wasteful expenditure and unauthorised expenditure negatively affect the total effciency scores. Irregular expenditure has no statistical effect on efficiency, arguably because of the nature of this financial mismanagement being expenditure that may be for a good cause but not approved procedurally.Conclusion: There is room to increase efficiency in studied municipalities, especially by reducing wasteful expenditure and unauthorised expenditure. The Public Finance Management Act provides astute guidelines that will bring efficiencies in municipalities; however, a review may be necessary to be progressive. The South African Local Government Association and Cooperative Governance and Traditional Affairs Department must capacitate municipalities and work with the auditor general to implement audit recommendations.

The Influence of Infrastructure Financing on Rural Municipalities in Limpopo Province, South Africa: Issue for Consideration

“…A lagging response by municipal governance to build up or encourage internal controls, a cultivation of absence of repurcussions and functioning beyond entirely assimilated information technology systems aggravate the existing conditions of municipal financial performance (Auditor-General South Africa 2021). Because of failure to implement budget-related, ethics and accountability and other policies, these financial management issues continue to hinder municipalities' positive progress (Mishi, Mbaleki & Mushonga 2022).…”

Measures that may assist non-performing municipalities in improving their performance

“…Most municipalities in South Africa are technically insolvent as the liabilities outweigh their assets and lack the liquidity to cover their operating expenditures (Ryan 2020). Municipal deficits have worsened and prevent municipalities from progressing (Glasser & Wright 2020;Mishi et al 2022). The latest municipal financial sustainability index (NT Ratings Africa 2020) found that 54 municipalities had more than 5% operating deficits of total direct revenue and 146 had financial statement issues.…”

“…This leadership should ensure that municipalities are guided into an adequate part of performance management and development (Magagula et al 2022). These financial management issues continue to hinder municipalities' positive progress (Mishi, Mbaleki & Mushonga 2022).…”

Universities as anchor institutions in place-based development: Implications for South African universities engagement

“…However, within the South African context the relationship between the local or provincial government and most universities, especially those in rural settings, seems to hinder such constructive collaborations. High levels of financial mismanagement, corruption, and inefficiency (Mishi, Mbaleki, and Mushonga 2022) have eroded much of the trust between universities and government structures around rural based universities and present even more laborious challenges for anchoring.…”