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Local Municipality Productive Efficiency and Its Determinants in South Africa

Literature › Works

Nara F. Monkam (2011). Local Municipality Productive Efficiency and Its Determinants in South Africa. University of Pretoria Department of Economics Working Paper Series, Working Paper 2011-20. University of Pretoria, Department of Economics.
Type working paper
Scope Post-1994 South African economy
Method econometric
Period studied 2007–2010
Regions South Africa, local municipalities (B1-B4)
Themes transition post apartheid, macro fiscal finance debt, education human capital, methods data sources
Citation key monkam2011

Argument

The paper estimates the technical efficiency of South African local municipalities in 2007 using input-oriented DEA-VRS. A second-stage Tobit regression then explains the scores. Average efficiency is very low, especially in B3 (small-town) and B4 (rural) municipalities, and the gap between best and worst performers is large. Fiscal autonomy, the vacancy rate in senior posts and municipal managers' postgraduate qualifications are the main significant determinants. The paper argues for more revenue autonomy that accounts for disparities among municipalities, higher capacity at the top of municipal administrations and more citizen participation. The SFA analysis is announced but not reported.

Evidence and method

2007 Stats SA Non-Financial Census of Municipalities (outputs: consumer units receiving water, electricity, sanitation and refuse removal), 2007 Community Survey (population, household access, education, income), National Treasury local government budget data (operating expenditure 2007/08, own revenue share), Municipal Demarcation Board capacity assessment (vacancies, manager qualifications), IEC council seat shares, SARB Quarterly Bulletin fiscal aggregates 1999-2010, and a July 2011 interview with a National Treasury official.

Findings

  • Only a small share of municipalities lie on the DEA efficiency frontier, and average efficiency is very low. (p. 25)

    It shows that in 2007, approximately 7.6 percent of local municipalities were efficient relative to others with an efficiency score equal to one.

  • B1 municipalities score highest and B3 lowest; the implied input saving is about 16% for B1 and 80% for B3. (p. 26)

    This suggests that on average, B1 and B3 municipalities could have theoretically achieved the same level of output with about 16 percent and 80 percent fewer resources respectively

  • Sub-national governments carry the bulk of government expenditure in South Africa. (p. 9)

    the share of sub-national government (provincial and local) expenditures in total government expenditures in 2010 was approximately 62 percent.

  • There is a large mismatch between sub-national revenue powers and expenditure responsibilities. (p. 10)

    this four percent share of sub-national government tax revenue is well below the expenditure level of 62 percent, highlighting the limited revenue powers and significant expenditure responsibilities

  • Fiscal autonomy has a positive effect on municipal efficiency, in line with decentralization theory. (p. 29)

    The positive impact of fiscal autonomy on municipal performance efficiency confirms the traditional fiscal decentralization theory

  • A higher vacancy rate in senior (Section 57) posts significantly lowers efficiency. (p. 30)

    The results also show a significant and negative effect of the vacancy rate in Section 57 on efficiency.

  • A municipal manager with a postgraduate degree is associated with markedly higher efficiency. (p. 30)

    the efficiency score of the municipality he/she is managing would be 0.170 higher than a municipality headed by a MM with no postgraduate degree.

  • A larger share of high-income residents is associated with lower efficiency. (p. 30)

    the higher the percentage of the population with a gross monthly income greater than 12800ZAR, the lower the efficiency levels.

  • Efficiency rankings are sensitive to whether supply-side or demand-side output measures are used. (p. 28)

    Compared to the DEA efficiency scores from the supply side, B3 and B4 municipalities appear to have higher efficiency scores on average in 2007.

  • The paper acknowledges the apartheid inheritance as a background constraint on local government. (p. 12)

    Added to that, socio-economic inequalities and hardship inherited from the apartheid era have accentuated these challenges.