Treasury terms failing municipalities a fiscal risk

Local government allocations will increase by 4.1% over the medium term to boost service delivery to the poor, but additional money for municipalities will be accompanied by more national intervention, according to Thursday’s medium-term budget policy statement (MTBPS).

In contrast, the allocation for the national government will contract by 1.8% while that for provincial governments will increase by 0.7%. 

This reconfiguration in the equitable share formula takes into account projected household growth and increases in water and electricity costs. 

Ahead of delivering his first MTBPS to parliament, new Finance Minister Enoch Godongwana told reporters he considered failing municipalities one of the big fiscal risks to the state.

Local governments will receive a range of conditional grants, including to improve water and waste water management, but these will be tailored to incentivise better management. National departments are expected to apply greater scrutiny to projects to ensure better performance. 

In some cases, direct transfers will be converted into indirect allocations, to be spent by national departments on behalf of municipalities.

“Government proposes to apply transparent and consistent criteria to create a more systematic approach to these conversations,” Godongwana said. “This will give national departments more flexibility in using funds where they are most needed, while strengthening governance.”

The MTBPS frankly assesses that “substantive changes” are needed to make municipalities work and that many simply lack the capacity to carry out their financial responsibilities.

Hence, R1-billion was spent on financial reporting consultants in 2019 and financial reporting is a core function of internal finance units. The treasury this year reviewed existing capacity building programmes and found these often failed and needed rethinking.

“The programmes cannot create an internal culture of accountability and commitment: that is the responsibility of political and administrative leaders in local government.”

Instead, the MTBPS suggests, the focus must shift to developing capability, that takes into account not only individual skill but collective environments and systems. Pilot sites will be identified in the national budget in February to launch fresh initiatives.

The plans were put forth by the treasury 10 days after local government elections in which service delivery failures contributed to the ruling ANC falling below 50% in poll support for the first time in South Africa’s democratic era.

However, the poor growth and lower spending will still see transfers to municipalities and provinces grow at below inflation rate in the 2022 medium-term expenditure framework period.

The provincial equitable share will be lower in 2022 and 2023 before rising above 2021 levels for the first time at the end of the three-year cycle.

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