Financial Problems in Local Government

1 LOCAL GOVERNMENT’S FINANCIAL CHALLENGES A fresh look at local government’s deliver obligations and resource requirements is needed. HILDEGARDE FAST makes the case for a differentiated approach. It is common knowledge that many municipalities in South Africa are financially in dire straits. In the public discourse, the focus is often on operational issues such as poor revenue collection, unsustainable debt burdens, and lack of financial management capacity. In seeking to understand the financial challenges facing municipalities, it is important first to take a step back and ask broader questions, namely: What is local government required to do? Where should the resources come from? And is there a need to change the current intergovernmental fiscal system to ensure that local government can do its job? Constitutional mandate Municipalities are given five over-arching tasks in Chapter 7 of the Constitution: to govern in a democratic manner, to ensure the provision of basic services, to promote social and economic development, to promote a safe and healthy environment, and to encourage community participation in local government. The specific functions assigned to municipalities are subsequently listed in part B of schedules 4 and 5 of the Constitution. Delivering on these mandates invariably has financial implications. Whether it is extension of infrastructure for basic services or promotion of economic development, municipalities require resources to perform their constitutional functions. Revenue sources Municipalities have two main sources of revenue, namely own revenue and intergovernmental transfers. Own revenue consists primarily of revenue from property rates and surpluses generated on electricity and water accounts. It is important for municipalities to balance these revenue sources appropriately. A recent study undertaken by the Financial and Fiscal Commission (FFC) has shown that some municipalities do not maximise some revenue sources while simultaneously over-utilising others. This can result in economic distortions. For example, some municipalities collect relatively little from property rates but have high electricity tariffs, which may discourage businesses that rely heavily on electricity from investing in that municipal area. Municipalities need to understand the crucial link between decisions on revenue sources and their attempts to promote local economic development. In considering intergovernmental transfers, the imperative to redistribute resources and alleviate poverty needs to be taken into account, given the historically unequal development of South Africa. It is appropriate for redistribution to be funded primarily from the centre, since municipalities have different levels of poverty and thus varying fiscal capacity to address poverty. There are three general categories of intergovernmental transfers to municipalities, and each is evaluated below in terms of the prerogative to target resources to historically under-resourced areas. The first category is the equitable share transfer, which is local government’s entitlement to revenues that are collected nationally. Currently, the equitable share 2 for local government is distributed according to a formula that has two components, namely a Services (“S”) grant and an Institutional (“I”) grant. The S grant makes up more than 90 per cent of the overall equitable share transfer and is calculated according to the number of poor households in each municipality. This means that municipalities with high numbers of low-income households receive a greater proportion of the equitable share than municipalities with relatively few poor people. The local government equitable share requires careful consideration. Some question whether the portion allocated to municipalities is sufficient for municipalities to deliver at least basic services to residents. The difficulty lies in answering this question: it...