A wide range of indicators informs municipal financial health. In 2014, National Treasury published a uniform set of financial norms and ratios for local government. Statistics South Africa recently published data that can be used to inform these norms. In the examples below, we explore how municipalities fare in terms of remuneration and contracted services within local government.
According to the report: Municipal Remuneration and Contractor Spending issued by Statistics SA at the beginning of July 2023, this was payments made to internal employees and external consultants:
- Total municipal expenditure was R472 billion in the 2022 municipal financial year, according to National Treasury, MFMA Circular No. 71, Uniform Financial Ratios and Norms, with remuneration costs accounting for R132 billion, or 28% of the total. Total expenditure excludes surplus, which is a balancing figure in the statistical release and remuneration includes employee-related costs and remuneration of councillors. The aggregate proportion of 28% falls within the National Treasury norm of 25%‒40%. However, a more nuanced picture emerges if we map all 257 municipalities individually.
- In both infographics, each dot represents a municipality and its position on the x-axis the proportion of remuneration to total expenditure. According to the data 140 of 257 municipalities in the country fall within the norm. 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%. Western Cape recorded the largest share of municipalities (21 of 30) that complied.
- According to National Treasury, when this ratio exceeds the specified norm, it may indicate excessive staffing, inefficiencies or a misallocation of funds. However, National Treasury also advises keeping 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 of 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.
- 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 the total expenditure in Dr Ruth Segomotsi Mompati District Municipality in the North West Province, near Vryburg according to the second infographic. 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 were analysed.
- According to the report, 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. 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.
An interesting question comes to mind. Could there be a relationship between the two indicators? “One could surmise that 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. Municipalities with excessive spending on both fronts might warrant further investigation,” StatsSA concluded.
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