Municipal amalgamations and scale economies: Evidence from South Africa’s structural reforms

Municipal amalgamations have been implemented for, among others, linguistic, cultural, geographic, service equity, social transformation or political reasons. However, the idea that larger municipalities are in a better position to reap the benefits of scale effects has been the main motivation for amalgamations in several industrialised countries and, in more recent years, South Africa. Existing literature suggests that financial performance has not improved after municipal amalgamations in South Africa. However, this literature has relied almost exclusively on evidence from descriptive studies and similar approaches. Using the difference-in-differences approach with municipal panel data, this study sought to determine the financial impacts of the 2016 South African amalgamations. The results suggest that the amalgamations did not give rise to scale effects as they had no significant impact on operating expenditure per capita. Suggestive evidence, based on descriptive analyses, is presented of some of the main factors that might militate against post-merger cost savings in a developing country setting – the transition grant, whose scope is very limited, the harmonisation of salaries and service levels in the post-merger municipality, and poor financial governance.