“Towards a Review of the Local Government Financial System”

Yunus Carrim
Deputy Minister of Cooperative Governance and Traditional Affairs

NATIONAL ASSEMBLY BUDGET VOTE DEBATE
31 May 2011

Need for more integrated cooperative governance system
There’s plenty talk about the need for changes to the current local government model within CoGTA, other organs of state, the media and the public. This has intensified with the local government elections. And so it should, so it should!
Most of us agree there should be changes to the model. What we may disagree about is exactly what these changes should be and at what pace they should be effected. We may also disagree about to what extent, if at all, the Constitution should be changed. But if any new model consensually decided on is to work, a fundamental aspect would have to be a new local government financial system. It is on this and other financial issues that I will focus.
But we need to be clear at the outset. Of course, municipal councilors and officials must take their fair share of blame for the inadequacies of local government. But so too must provincial and national government. We have not assisted local government effectively. Moreover, some of the key issues that municipalities have to respond to are more structural in nature and far more the responsibility of national government.  This would include the slow-down in the economy, high unemployment, population changes, in-migration to urban municipalities, the high number of indigent residents, increases in the costs of bulk services, and aspects of climate change. Municipalities bear too much of a burden for what are mainly the challenges of national government.        
We are not a federal state. We are a unitary state with some federal features. Fundamentally, we have forged our own, unique cooperative governance system in which there are three interrelated and interdependent, if distinct spheres.
And, given the structural challenges confronted by the country as a whole, and the nature of our three-tier government system, ultimately, the inadequacies of local government are a reflection of the failures of the cooperative governance system as a whole. So all three spheres of government have to work far more effectively together to ensure that local government significantly improves service delivery and development.
Part of this entails shaping a new local government financial system in which national government assists local government with both more funds and developing the capacity to more effectively spend the funds.

Some challenges with the current financial system
So what are some of the challenges of the current local government financial system?
A key premise of the current financial model is wrong. It’s based on the presumption that municipalities can raise 95% of their own revenue. But this was the case before 1994 when municipalities had much smaller boundaries, mostly excluded the African majority, and had a limited service delivery role!  It cannot apply to the new municipalities, with their larger boundaries, significantly bigger numbers of residents, and expanded developmental role.      
Clearly, local government needs to be allocated more funds from the national budget. But this, in itself, will not solve its financial problems. Local government will have to be assisted with capacity to spend its funds more productively and effectively.

Many municipalities do not have sufficiently qualified people to manage their funds effectively. Poorer municipalities are unable to pay for the technical skills they need. In the 2009/10 financial year, municipalities were unable to spend 17,1 % of their capital budget.
Some municipalities also mismanage their funds, using them unproductively or for purposes that do not serve service delivery and development goals.  
But municipalities also need to raise more of the revenue due to them, especially from those who can afford to pay. By December 2010, the municipal debt had reached R62.3 billion. 61.9 % (R38.3 billion) of the debt owed is owed by residents, 20.7 % (R12.8 billion), by businesses, 5.1 % (R3.1 billion) by national and provincial departments and 12.4 % (R7.6 billion) by others. According to our department, these “others” refer to, among others, debtors in respect to traffic fines, dumping sites and cemeteries.

 
Some municipalities, especially in the rural areas, are technically unviable – they do not have a minimal economic, financial or revenue base. The majority of the people living in these municipalities are indigent. These municipalities depend substantially on intergovernmental transfers to survive. The transfers are used up mainly on salaries and operational expenses with very little money left over for service delivery.
 
Then there are the unfunded mandates – municipalities fulfill provincial functions
like libraries, aspects of health and social services, including early childhood development, and homes for the elderly, disabled and abused women. Municipalities get no or little money for this from the provinces!    
District municipalities are seriously hampered by the withdrawal of the Regional Services Levy from businesses which has not been effectively replaced.  
Despite its huge responsibilities, local government gets at present only 8,7% of the national revenue. While this represents a significant increase from the 4,7 % of the budget local government received in 2006, it is still not enough. There are inadequacies in the formula used to decide the equitable share allocation to local government as well as how this share is distributed among the municipalities.  A fundamental problem is that the formula is based on census data that is updated every 10 years. The formula also leads to the larger urban municipalities getting a disproportionately larger share.
 
So there are these and other challenges. What then do we do?
Responding to the Challenges

REVIEW OF INTERGOVERNMENTAL FISCAL SYSTEM
The first most fundamental aspect is to acknowledge that even if municipalities were to raise all the funds due to them and effectively spend all their money, they would still not be able to properly fulfill their expanded responsibilities. The answer is not to constrict national allocations to local government – but to allocate adequate funding AND assist with capacity-building so that the funds can be effectively and productively spent. Moreover, an important chunk of the extra funds should be allocated for capacity-building and a reasonable system can be found to allocate the funds incrementally, and at different times to different municipalities as their capacity develops. This funding approach would also be consistent with the differentiated local government model that is likely to emerge.

There needs to be an expeditious and significant overhaul of the current Intergovernmental Fiscal System, including the formula for the “equitable share” – the allocation of money from the national budget to each sphere of government. But there also needs to be a review of the formula used to distribute the “equitable share” among the 278 municipalities. The formula needs to directly take into account the specific spatial development patterns, extent of indigent residents, capacity to raise revenue and cost of providing services of a municipality.  

UNVIABLE MUNICIPALITIES
CoGTA nationally is working with provincial CoGTA departments to identify municipalities that are considered unviable. At this stage, the Eastern Cape has identified 8, Mpumalanga 6, Northern Cape 13 and KwaZulu-Natal 14 municipalities. CoGTA is working on a set of common criteria to define a municipality that may be considered unviable. Once the process has been advanced sufficiently, government will consider engaging the Municipal Demarcation Board on the matter.

It may be that we will need different approaches to different municipalities considered unviable. Some could be made viable by more effective capacity, funding and other support from provincial and national government. Others might have to be absorbed into adjoining municipalities. Obviously, this will not of itself solve the problem. Provincial and national government will have to provide the necessary assistance to the municipalities that absorb unviable municipalities to be able to function effectively.  

   
INTENSIFYING CAPACITY-BUIILDING PROGRAMMES
The financial and other capacity-building programmes of municipalities need to be intensified. CoGTA is working with National Treasury, the Auditor General’s Office, SALGA (South African Local Government Association) and other institutions to ensure this. Among other aspects are the following:   
    •    • Cooperation with National Treasury and University of Witwatersrand to provide a Certificate Programme in Management Development for Municipal Finance. 

    •    • Cooperation with the South African Institute of Chartered Accountants on  the Local Government Accounting Certificate targeted at municipal finance officials below accountants - debtors' control clerks, tender staff, cashiers, bank reconciliation administrators and others.  This is a SAQA (South African Qualifications Authority) recognised qualification at NQF (National Qualifications Framework) level 3. The current intake is 2000 learners in the 12 months programme which involves both contact training and workplace practical training. 

    •    • An advanced certificate at NQF level 4 is being piloted for learners who have already completed the certificate. There were 110 learners last year in this programme, which seeks to provide a more in-depth knowledge and competence of key technical areas of accounting - for example, presentation of financial data, operating a computerised accounting system, recording and evaluating costs and revenues, etc. 

The Municipal Systems Amendment Bill, recently passed by parliament, which is aimed at the greater professionalization of the administration in municipalities, including through providing for minimum qualifications for senior managers, will also assist in strengthening the financial capacity of municipalities.  

The private sector can also play a useful role in assisting municipalities with their financial management challenges, as is happening in some municipalities. CoGTA will be intensifying our “Business Adopt a Municipality” campaign.

DEBT COLLECTION, BILLING AND REVENUE-ENHANCEMENT
As part of the LGTAS, (Local Government Turnaround Strategy), CoGTA is in the process of developing a revenue enhancement programme to support municipalities to improve their revenue collection. The revenue enhancement programme is to seek to:
    •    Ensure municipalities have credit control and debt collection policies that have been through a public consultation process
    •    Promote efficient and effective customer relations management.
    •    Support municipalities to develop billing systems with accurate property data and customer information,  better metering infrastructure and more effective billing and financial information management systems.
    •    Ensure that municipalities improve customer care management by responding timeously to queries.
    •    Provide guidance to assist municipalities to write off irrecoverable debt
    •    Implement a code of conduct to ensure that officials and councilors are not in arrears in payment of municipal bills. As government we need to provide leadership to citizens in payment of our municipal bills.
 
As government, we also need to organize ourselves better to ensure that all government debt owed to municipalities is paid.  COGTA is in discussions with the Presidency, National Treasury and Public Works Department to find ways to address the challenge of municipal debt owed by government departments. These issues are also to be taken to the President’s Coordinating Council for action.

IMPROVING AUDITS
The “Operation Clean Audit” campaign, which is aimed at ensuring municipalities receive unqualified audits by 2014, needs to be intensified. The campaign aims to strengthen the capacity of municipalities to ensure efficient financial management, accountability, transparency and value-for-money activities. Improved financial systems will lead to greater service delivery and development.  
As part of the campaign, 103 municipalities have now established Municipal Public Accounts Committees. Individual or shared Internal Audit Committees have been established in 263 municipalities.
 
There has certainly been some progress in the audit outcomes of municipalities, even if there is still a long way to go. During the 2008/9 financial year, 103 municipalities received disclaimers, but in 2009/10 it was 53. Municipalities with adverse audit reports were reduced from 10 to 7 in the same period. Importantly, the number of municipalities that received financially unqualified reports with findings has increased from 113 to 120. Municipalities with completely clean audits  increased from 4 to 7 in the same period.   Of course, the performance of municipalities in the 2010/11 financial year is yet to be finalised, but these figures hold some promise.  

Obviously, more needs to be done to strengthen the campaign. This includes:
    •    Establishing more and more effective Municipal Public Accounts Committees.
    •    Strengthening the capacity of internal audit units and audit committees,
    •    Implementing municipal audit remedial action plans to address audit findings,
    •    Recruiting and retaining critical skills.
 
Some of these measures are also going to be effected through amendments to legislation and regulations.  
Consideration also needs to be given to appointing chartered accountants in as many municipalities as possible. Of course, there will be financial costs to bear in this regard, but the benefits will surely outweigh the costs.

SPECIAL PURPOSE VEHICLE
The Department is in the final stages of setting up a Special Purpose Vehicle (SPV), the Municipal Infrastructure Support Agency (MISA), to accelerate municipal infrastructure delivery. Particular attention will be paid to the weaker municipalities. The SPV would aim to:   
    •    Support comprehensive infrastructure planning at municipal level
    •    Support municipal infrastructure development, maintenance, operations and service provision in low capacity municipalities through the procurement of relevant service providers, and ensuring performance as contracted
    •    Support the management of operations and ensuring a proper maintenance programme for municipal infrastructure
    •    Coordinate a focused technical support programme with existing support partners (national sector departments, provinces and service providers) in terms of an agreed Support Plan to assist municipalities to deliver on their comprehensive infrastructure plan, its delivery modalities and funding streams
    •    Monitor the quality of infrastructure provided
    •    Develop and coordinate the implementation of an appropriate sector-wide capacity development initiative and assist municipalities to develop a capacity development plan to strengthen their institutions over the long term
 
In view of the pending establishment of the SPV, funding for the infrastructure component of the Siyenza Manje project currently run by DBSA has been transferred to CoGTA, while funding for financial management support will be administered by National Treasury. A Task Team comprising senior officials from CoGTA, DBSA and National Treasury are working on ensuring a smooth transfer of aspects of the project. If necessary, this will take place in a phased manner.

ACCELERATING LGTAS
Obviously, addressing the financial challenges of municipalities cannot be separated from dealing with the overall challenges of municipalities. These overall challenges are going to be dealt with more actively through the consolidation and acceleration of the LGTAS (Local Government Turnaround Strategy). This is our major priority in the months ahead. The LGTAS has become the RDP (Reconstruction and Development Programme) of local government. It is encapsulated in the outcome 9 Performance Agreement the CoGTA Minister signed with the President. It is the basis on which the public will ultimately judge CoGTA’s performance – and we simply have to deliver on our commitments.  

   
We just emerged from the most remarkable elections in this country since 1994. The 57% poll, the highest ever for local government elections, in very difficult circumstances, is very encouraging. But if people were enthusiastic to vote, they are even more determined that their conditions must improve. We are all under pressure. More than ever before! We simply have to work more actively with communities to significantly accelerate service delivery and development. These elections have given us a new impetus. Let’s make the most of it!