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

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.