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