Local municipality productive efficiency and its determinants in South Africa

Abstract

This paper assesses the technical efficiency of 231 local municipalities in South Africa for 2007 and investigates the potential determinants of efficiency gaps using the non-parametric data envelopment analysis technique. Efficiency scores are explained in a second-stage regression model using a Tobit regression model. To the best of our knowledge, this is the first attempt, using such a technique, to assess technical efficiency at the local government level in the African context. The results show that, on average, B1 and B3 municipalities could have theoretically achieved the same level of basic services with about 16% and 80% fewer resources respectively. Furthermore, fiscal autonomy and the number and skill levels of the top management of a municipality's administration were found to influence the productive efficiency of municipalities in South Africa. Perhaps most importantly, the results depict a bleak picture of the democratic behaviour at the local level in South Africa. It appears that higher income and highly educated households do not feel the incentive to be active participants in public decision-making processes. The paper findings raise concerns over the future of local municipalities in the country, especially about their capability to efficiently deliver expected outcomes on a sustainable basis.

Keywords:

• municipalities
• spending efficiency
• sub-national government finance
• fiscal decentralisation
• data envelopment analysis
• Tobit

JEL codes:

• H11
• H71
• H72
• H77

Notes

²The efficiency scores estimated will be relative to the best performing or the most efficient DMU(s) (Ramanathan, 2003).

³See Afonso & Fernandes (2008) for a review of this literature.

⁴According to Afonso & Fernandes (2008), discretionary inputs are those inputs whose quantities can be changed at the will of municipalities. The standard DEA model takes into consideration only these inputs while ignoring local socio-economic and demographic factors that are relevant in explaining performance outputs but are not within the control of municipalities.

⁵For a review of literature in that regard, please refer to Afonso & Fernandes (2008).

⁶Most of the studies that examined the effects of grants on the local government spending efficiency found that they limited the efficiency of municipalities in the delivery of local public services (Van den Eeckaut et al., 1993; De Borger & Kerstens, 1996; Athanassopoulos & Triantis, 1998; Balaguer-Coll et al., 2002; Loikkanen & Susiluoto, 2005).

⁷Section 152 of the Constitution states that the objects of local government are: ‘a. to provide democratic and accountable government for local communities; b. to ensure the provision of services to communities in a sustainable manner; c. to promote social and economic development; d. to promote a safe and healthy environment; and e. to encourage the involvement of communities and community organisations in the matters of local government’.

⁸There is an asymmetrical approach to service delivery is South Africa whereby a municipality might be either authorised to provide a service or not. This service delivery arrangement results in differences in the nature and level of municipal expenditure. This may skew the results, especially for B4 municipalities where local municipalities tend not to be authorised to provide water and sanitation functions because district municipalities have that authority (Financial and Fiscal Commission, 2011).

⁹Waste management (or refuse removal) refers to the collection, treatment, and disposal of waste (StatsSA's 2007 NFC).

¹⁰In economics, a resource allocation mechanism is efficient when marginal (social) benefit is equal to marginal (social) cost. In general, overconsumption of public goods is a common characteristic of lack of correspondence and fiscal autonomy.

¹¹The 83% value is obtained from ([1 – 0.173] ×100).

¹²The complete DEA efficiency scores for all municipalities in each cluster and for which data are available in 2007 are available upon request.

¹³The detailed results and the complete DEA efficiency scores using the 2007 Community Survey, for all municipalities in each cluster and for which data are available in 2007, are available from the author upon request (cf. Table A3 of Appendix A for a summary of results).

¹⁴As of 17 October 2011, US$1 = 8.00 ZAR.