The relationship between unlawful expenditure and municipal financial performance in a South African context

Abstract

South African municipalities are experiencing a deterioration in municipal financial performance in addition to proliferated unlawful expenditure. Good municipal financial performance is imperative for social development and economic growth in South African communities. Furthermore, adequate municipal financial performance is a good measure of the effectiveness of the administration of the public funds in the sphere of local government. This research was conducted to determine the existence and extent of the relationship between unlawful expenditure and municipal financial performance in a South African context. The secondary objectives of the research were, first, to understand the components of unlawful expenditure in municipal financial performance; secondly, to determine the underlying causes of unlawful expenditure and poor municipal financial performance; thirdly to determine the impact of unlawful expenditure on poor municipal financial performance and lastly, to propose strategies to minimise unlawful expenditure. To achieve the research objectives, a positivist paradigm was adopted, where a document analysis provided panel data to establish the correlation between unlawful expenditure and municipal financial performance. A non-probability, convenient sampling method was used, resulting in a sample of 121 municipalities. Secondary data from the audited annual reports of these municipalities were collated for the five financial periods between 2013/14 and 2017/18. The study tested hypotheses on the relationship between unlawful expenditure and municipal financial performance variables. To understand the relationships (as opposed to predicting them), all variables were explained, regardless of their significance. A statistically significant negative relationships were found between unauthorised expenditure and cost coverage, current ratio, remuneration as a percentage of total expenditure and net operating surplus margin. Furthermore, a statistically significant positive relationship was found between irregular expenditure and net operating surplus and lastly, statistical significant negative relationship was found between fruitless and wasteful expenditure and outstanding service debtors to revenue and cost coverage. The findings of the study contribute to the limited literature on municipal financial performance, to the South African public, to the Chapter 9 institutions of the Constitution of South Africa, 1996, and to those charged with governance by clarifying the relationship between unlawful expenditure and municipal financial performance, and its impact. Based on research question and study findings, the study recommended that those charged with governance should focus on addressing the causes of poor cost coverage, inadequate current ratio and low net operating surplus margin. Furthermore, the study recommended that the tenets of sound governance theories such as resource-based theory, stakeholder theory and stewardship theory should be considered for individual or combined adoption, as part of strengthening financial administration. As a matter of courtesy, Chapter 9 institutions such as the AGSA, the Public Protector and other relevant law enforcement agencies, such as the SIU should consider the findings of this study when making recommendations in response to internal control deficiencies identified.