Understanding the impact of financial sustainability on South African municipalities

Abe Mbulawa

doi:10.4102/td.v15i1.656

Abstract

This article acknowledges the lack of skills and poor financial governance within South African municipalities but argues that these factors are an insufficient explanation of their increasing fiscal distress, which was found at over 90% by 2016. It employs the concept of financial condition to construct an econometric function for South African local government. This financial condition function confirms that the fiscal framework of South African local government is distressed. The article further concludes that as service delivery improves, so does the fiscal distress. This applies even to municipalities that receive audit outcomes without material findings. As an illustration, the article uses the collective debt incurred by municipalities to Eskom – the energy utility company. The article argues that it is mathematically impossible to settle this debt within the current local government fiscal framework. The conclusion confirms the importance of constructing the financial condition function as an enabler for improved local government financial health.

Highlights

The poor financial state of municipalities is well researched and documented across the world, starting with the United States since the New York fiscal crisis of the 1970s (Clark, Ferguson & Shapiro 1982), as well as in recent times (Wang, Dennis & Tu 2007)
The results on financial condition that were used in this study offer a table of the μ-scores for South African metropolitan and local municipalities
It is observed that the absolute value of negative coefficients (0.68) is greater than those with positive attributes: cash and budget solvency at 0.59. This means that the current fiscal framework of South African local government is negative or leads to greater fiscal distress

Summary

Introduction

The poor financial state of municipalities is well researched and documented across the world, starting with the United States since the New York fiscal crisis of the 1970s (Clark, Ferguson & Shapiro 1982), as well as in recent times (Wang, Dennis & Tu 2007). The three sets of reporting provide an oversight mechanism for the municipal council, COGTA and National Treasury The objective of this good financial governance is to ensure financial sustainability of municipalities by proactively preventing fiscal distress. The indicators consist of five singular ratios: (1) total debt to revenue (excluding grants), (2) debt service coverage ratio, (3) debt to net cash ratio, (4) cash flow interest coverage, and (5) liability management ratio These ratios are analysed descriptively in the annual State of Local Government report, which forms part of the Auditor-General’s and National Treasury’s financial viability assessments. Data were sourced from the National Treasury which provided the audited financial statements of 233 municipalities from the 2012/2013 to 2015/2016 fiscal years During this period, there was a total population of 233 local and metropolitan municipalities in the country.

Ethical consideration

Discussion

Limitations

Findings

Conclusion

1: Among the worst – poor