Major abnormality detected in South Africa’s municipalities

 ·10 Jul 2023

The vast majority of South Africa’s municipalities are using an abnormally high number of contractors to deliver services and do other public work – with one using almost half of all its spending for this purpose.

This is one of the more alarming findings from national statistics body, Stats SA, which looked at remuneration and employee costs, and the cost of contractors as a percentage of spending across all 257 of South Africa’s municipalities.

According to Stats SA, there is a wide range of indicators that inform municipal financial health. In 2014, National Treasury published a uniform set of financial norms and ratios for local government.

Using these norms, it’s been established that aggregate spending on remuneration costs should be between 25% and 40% of a municipality’s expenditure – and spending on contractors should be between 2% and 5%.

While South Africa’s municipalities largely fall within the range in the former – the latter shows a pattern of abnormal spending in over 200 locations.

Spending on remuneration

Across all municipalities, total municipal expenditure was R472 billion in the 2022 municipal financial year, Stats SA noted, with remuneration costs accounting for R132 billion, or 28% of the total.

This aggregate proportion falls within the National Treasury norm of 25%‒40%. However, a more nuanced picture emerges if we map all 257 municipalities individually.

The stats body plotted a dot graph, showing how each municipality falls into this range. The location of each municipality on the x-axis represents its share of remuneration costs to its expenditure.

West Rand District Municipality appears on the far right, recording the highest proportion. Its remuneration costs accounted for 78% of its expenditure.

Rustenburg Local Municipality in North West registered the lowest reading at 12%.

“According to National Treasury, when this ratio exceeds the specified norm, it may indicate excessive staffing, inefficiencies or a misallocation of funds,” Stats SA said.

“However, National Treasury also advises to keep in mind the powers and functions of the municipality when evaluating this ratio.”

District municipalities, for example, perform an administrative role and are typically not directly involved in service delivery, except for a few that have taken on the role as water service authorities and water service providers.

Significant expenditure items such as water and electricity purchases are usually not included in their budgets. As a result, the share of remuneration costs to total expenditure for many districts tends to be higher compared with their local and metropolitan counterparts.

Considering this, just over half (140) of municipalities fall within the National Treasury norm. Western Cape recorded the largest share of municipalities (21 of 30) that complied.

Paying contracted services

Municipalities often outsource work to consultants, professional services, and private contractors.

Local government spent R39 billion on contracted services in the 2022 financial year, accounting for 8.4% of total expenditure. This is above the National Treasury norm of 2%‒5%.

Four municipalities spent no money (or 0% of total expenditure) on contracted services.

On the other end of the scale, contracted services accounted for almost half of total expenditure in Dr Ruth Segomotsi Mompati District Municipality.

Nationally, 52 of the country’s 257 municipalities were in alignment with the norm. Free State registered the largest share of municipalities (13 of 23) that complied.

“If a municipality exceeds this norm, it could indicate that many functions are outsourced to private contractors, not efficiently utilised or that a municipality is struggling to build its own human capacity, increasing its reliance on private contractors,” Stats SA said.

“However, National Treasury also notes that this ratio depends on the service delivery model that the municipality has adopted. Municipalities often struggle to find or attract the skills that they need, with contractors filling a vital gap.”

Stats SA also noted that there may be a relationship between these two indicators which bears further scrutiny and research.

“Municipalities that have little need for contracted services might spend relatively more on remuneration as most of the work would be done in-house.

“In contrast, municipalities that rely heavily on contractors to fill a skills shortage might spend relatively less on wages and salaries,” it said.

However, municipalities with excessive spending on both fronts might warrant further investigation.

Read: These are the best and worst municipalities in South Africa

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