An integrated debt management model for municipalities in the Free State Province

Abstract

Municipal debt management in the public sector has emerged as a critical topic in the post-apartheid era in South Africa. After 20 years of democracy, the culture of non-payment for municipal services in South Africa continues to pose a serious financial challenge to municipalities. Therefore, an attempt has been made to identify debt management and its implications for public service delivery. In South Africa, there are 278 municipalities spread across the nine provinces and each plays a pivotal role in alleviating poverty and creating jobs. The availability, price and reliability of services have an impact on local economic performance and can significantly affect the quality of life of poor households. Municipalities receive intergovernmental transfers through the annual Division of Revenue Act. However, municipalities’ own revenue collection has been significantly declining as a result of greater reliance placed on intergovernmental transfers as a revenue source. The municipalities are the custodians of public funds, whether raised from their own revenue sources or received through intergovernmental grants. They are tasked with using these resources to respond to their communities’ need for infrastructure, service provision and spatial development within their boundaries. However, it is of concern that in many cases, the funds dedicated to service delivery growth and expansion are being mismanaged by municipal officials. Consequently, this has impacted on the quality and extent of the provision of essential services across the spectrum of municipalities in the Free State Province. It is evident that there is now a culture of non-payment, and the quantum of debt is material and substantial for debtors exceeding 90 days. This imposes the challenge of implementing stringent credit control and debt collection policies and procedures in order to arrest the growing escalation of debt. If the problem of non-payment persists, the government will be faced with a situation in which all major public utilities are likely to incur large and possibly unsustainable losses due to non-payment. Government will be expected to support these utilities through © Central subsidies. Cognisance should be taken of the fact that should the current trend of non-payment for services continue in the future, a collapse in service delivery will become inevitable. The purpose of the study is to identify debt management, its consequences, and the development of an integrated debt management model for municipalities in the Free State Province. The introduction to this research topic within the context of municipal debt points to the significance of this research topic and its intended benefits. Chapter 1 provides a theoretical review of governance in municipal financial management. Chapter 2 provides the legislative framework for local government financial administration, as well as the statutory roles, responsibilities and duties of officials and structures, followed by a discussion of revenue management and administration of debtors and funding models for municipalities. Municipalities are the custodians of public funds and are tasked with using these resources to respond to their communities’ needs in terms of infrastructure, local services such as water, electricity and refuse removal, and the guiding of spatial development within their localities. Chapter 3 discusses local government financial management and the challenge of debt management. Aspects discussed in this chapter include the policy framework of financial management and the requirements of local government, the Local Government: Municipal Finance Management Act (MFMA), 2003 (Act 56 of 2003) (RSA, 2003), the preparation of the annual local budget, the budget cycle, and the composition of the budget. In addition, the chapter details the roles and responsibilities of both the political and administrative functionaries within a municipality in terms of the budget. Chapter 4 outlines the debtor management cycle and the debtor control system, with an evaluation of municipal debt over three years in the Free State Province and its socioeconomic impact on debt and on the achievement of MDG goals by municipalities. The chapter concludes with a discussion of the debt challenges experienced by municipalities. Chapter 5 provides a comparative study, using secondary data from the National Treasury Database, of the debt position of Free State municipalities comparative to the municipalities in the other eight provinces. Chapter 6 discusses the research methodology employed in the study, including the analysis and interpretation of the data. Chapter 7 concludes the study by discussing the conclusions drawn, suggesting some recommendations, and highlighting the limitation of the study, as well as the implications for further research.