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The real impact of municipal budget cuts

The history, the facts, and how municipalities can make it work, by Carl Stroud, MD of Sebata Municipal Solutions, a MICROmega Group company.

Johannesburg, 08 May 2018
Read time 5min 00sec
Carl Stroud, MD of Sebata Municipal Solutions, a MICROmega Group company.
Carl Stroud, MD of Sebata Municipal Solutions, a MICROmega Group company.

In former Finance Minister Malusi Gigaba's February 2018 budget speech, significant budget adjustments were announced for this financial year, including R14.1 billion in reductions to direct and indirect infrastructure grants. Municipalities have been urged to improve revenue collection, work more efficiently, and implement cost-containment measures, says Carl Stroud, MD of Sebata Municipal Solutions, a MICROmega Group company.

In response to the resulting outcry from the public, the minister explained that the national government already provides extensive support to municipalities, but that too many don't charge tariffs that reflect the full cost of the services they deliver. They don't collect funds owed or adopt credible budgets, and as a result, they aren't able to pay their own creditors.

It's for this reason that national government has adopted an approach that allows it to a) review the effectiveness of existing support measures and b) introduce new instruments.

Rise of constrained municipal revenue

In a perfect world, 100% of municipal debt would be recovered through property rates, electricity and water sales, refuse removal, sanitation charges, licensing and building plan fees. But, in South Africa, this isn't the case.

With high unemployment rates, slow economic growth, weak consumer spending, and national policies that make provision for free basic services, there are always unbudgeted costs that result in municipalities not meeting their needs.

This is because consumers' ability to pay for their municipal services affects municipalities' ability to meet budgeted revenue targets.

But that's just a part of the greater problem.

Other factors that have contributed to municipal budget strain include:

* Municipal tariffs not being cost-reflective;
* Implausible budgets;
* Cost containment measures not being implemented;
* Generally Recognised Accounting Practice (GRAP) implementation challenges; and
* The conversion from cash-based to accrual accounting, which affected capital replacement reserves.

The revenue municipalities should raise

Because each municipality is different in size, economy, and the number of consumers reliant on subsidies, its respective ability to retrieve revenue is varied. Therefore, the percentage of total budget that each municipality should be able to raise (without subsidy) is:

High-capacity municipalities: 90%+
Medium-capacity municipalities: 80%+
Low-capacity municipalities: 70%+

To assist in managing revenue collection and controlled spending, several processes, systems and instruments have been put in place; a major one being...

The national implementation of mSCOA

Before July 2017, municipal charts of accounts were limited and followed no standard methodology. With each municipality formulating its own structures and classifications, inconsistencies were common, and there were concerns around transparency, accountability and governance.

Since then, however, all 257 of South Africa's municipalities have gone live with a new standardised financial classification framework: The Municipal Standard Chart of Accounts (mSCOA). This standardises the financial management processes across all municipalities by incorporating best practices and forcing accountability.

In time, mSCOA implementation should improve municipal reporting and increase levels of transparency and governance; factors that will hopefully lead to higher levels of municipal effectiveness, increased municipal revenue, budget management, and performance monitoring.

While the impact of mSCOA hasn't yet been fully felt, we should soon start to see improved municipality budget control and performance. This is because the stringent rules that were built into the systems make it more difficult to circumvent internal controls or process incorrect transactions.

Other ways of managing the budget cuts

Equally, financial turnaround plans are key to handling the budget cuts. Several municipalities have plans in place, but those that are under-capacitated don't necessarily know how to implement and manage these. This is why ongoing training is key to ensuring peak performance in a constantly changing environment.

Soon, smart systems will also play a role in managing resources at municipalities; water and electricity are mere examples of where these could be implemented.

Other ways that municipalities are addressing the new budgets include:

* Reviewing and implementing revenue enhancement policies and plans;
* Reducing expenditure on non-priority items; and
* Implementing the national cost containment measures released by government.

A new restructuring grant has also been established. This is a short-term intervention for struggling municipalities that commit to implementing the necessary reforms, getting political buy-in, and securing an approved financial recovery plan from the council.

Transitioning into new financial territory

While the year ahead may look dreary, I don't believe we should panic, as municipalities have always found ways to handle tough economic times. To navigate our way through this new financial environment, we should apply more focus to things, like:

* Market-related prices, to ensure municipalities are not over-charged;
* Eliminating non-priority expenditure; and
* Implementing and managing politically supported financial turnaround strategies that could lead to improved revenue collection.

In addition, there are many ways in which individuals and businesses can help, beginning with a change in attitude towards municipalities.

For instance:

1. Companies can address municipal gaps as a form of corporate and social responsibility.
2. Public-private partnerships mean that both parties can benefit, especially on large projects.
3. Plumbing and electrician apprenticeships can help to build skills, create jobs, and support water and electricity losses or backlogs, with trainees potentially being absorbed by municipalities afterwards.
4. Accounting trainees can assist municipalities with monthly reconciliations, reporting, internal controls, and financial statement compilation.

Bottom line? The municipal budget cuts are a significant adjustment from the national budgets of the past. But with the right tools, strategies, and implementation, these may be exactly what local municipalities need to address some of their historical shortfalls.

Editorial contacts
Little Black Book PR Renee Schonborn (083) 600 3121
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