Sustaining Local Government Finances: Financial and Fiscal Commission's Review of the Local Government Fiscal Framework

Briefing

22 Apr 2013

The Financial and Fiscal Commission hosted a media briefing on sustaining local government finances. The briefing was based on a report done by the Financial and Fiscal Commission on its review of the Local Government Fiscal Framework.
 

Minutes

Journalist: What are the major flaws in the current local government financial system?

Mr Bongani Khumalo: Looking at the operating side which consists of the normal running costs within a municipality, the total amount of the equitable share covers these running costs. However, how this total amount is allocated to specific municipalities can be improved. What the FFC found is that the current formula is actually sending more funds to urban rather than rural municipalities. What is also important is to ensure that the rural municipalities spend the money properly and that the government has appropriate mechanisms for the spending of these funds. The gap is found on the capital side and longer term maintenance and that gap has to be looked at in government's review processes. Another aspect which is noticed is that many municipalities have been deferring expenditure on day-to-day maintenance. This has gotten to a point where in some municipalities there is the urgent need for a massive upgrade before services can be delivered. In these cases, renewal and rehabilitation is required as against day-to-day maintenance.

Journalist: Why is more money being given to municipalities even when these municipalities are not spending the funds?

Mr Khumalo: Government has to design a system which is sensitive to the needs at local level. The challenge is how government ensures that these resources are actually spent. The Constitution places the responsibility on national and provincial government to capacitate municipalities.

Journalist:  Do provinces have the support systems and early warning mechanisms to pick up when municipalities are misappropriating the funds allocated to them?

Mr Khumalo: The proper method is not to intervene when the system is already broken. The system is supposed to have a set of indicators which raise red flags before things get out of hand. From the side of National Treasury, there are big efforts in putting these systems in place for big metros and at Provincial Treasuries for district and local municipalities. There have been success stories such as in the Western Cape and KwaZulu Natal. The essence is to pick up potential problems early enough, even through the budgeting process. If the early warning systems work, the trend of placing municipalities under administration is going to be greatly reduced.

Journalist: What are the long term consequences if the whole local government finance regime is not reviewed? What could the situation be in 30 years’ time if the current situation is not changed?

Mr Khumalo: If the current local government finance system is left the way it is without any improvement, it is going to break down. It is important for infrastructure in municipalities to be renewed and not just maintained. Local government cannot reverse the tide of rural-urban migration and this trend is putting so much pressure on the public services in the urban areas. If these public services are not properly managed and the economy enhanced, the system is going to break down due to pressure.

Journalist:  What is the impact of the upgrading of demographic data on local government finances and allocations?

Mr Khumalo:  The updating of demographic data is very important as the population of a municipality and the density of its communities are very important factors used in determining the amounts for grants and allocations to municipalities. If a rural municipality has experienced rural-urban exodus and such data is not updated, the rural municipality is going to be given more money than it can spend. Likewise, if more people have migrated into an urban area over a period of time and such data is not appropriately captured and updated, the municipality is going to get less money than it requires. The updating of demographic data is very important although it is important to note that demographics are not the only determinant for the allocation of grants and funds.

Briefing ended.
 

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