FUNDING

To the poor man his due

SALGA’s Executive Director for Municipal Finances, Simphiwe Dzengwa
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As a “measure of last resort”, National Treasury can withhold funding in the form of equitable shares from municipalities not honouring their financial obligation. But considering that these measures ultimately impacts the most vulnerable, the question of its appropriateness has to be raised.

Similarly, opposition parties and the South African Local Government Agency (SALGA) alike have objected to these measures, not on the basis that unscrupulous municipalities should not be held accountable, but rather in terms of its impact on service delivery and eventual implications for the poor, when other routes could have been followed.

In an exclusive with Service, SALGA’s Executive Director for Municipal Finances, Simphiwe Dzengwa, shares his point of view on the matter and elaborates on what exactly the situation entails and why various concerns have been raised against the decision.

Initiating the discussion with a brief exposition on what equitable shares are, Dzengwa says the Constitution of the country, more specifically the Intergovernmental Fiscal Relations Act, provides for the division of the national fiscus according the spheres of government: national, provincial and local government.

“Once the bulk amount, which is currently at 9.1% of the total budget, is allocated to local government, something that is called horizontal split is embarked upon by treasury, meaning that a specific allocation or amount would be given to each municipality according to a particular formula which is called the Equitable Shares Formula. So the equitable share is basically the allocation from the national fiscus that all spheres of government are entitled to,” he says.

As Dzengwa explains, municipalities mainly get their revenue from three sources: firstly, equitable shares (which is usually about 80% of their revenue), secondly from conditional grants and thirdly that which they collect on their own. He says the bulk of municipalities around the country, often because of where they are located, do not generate much revenue on their own and rely by and large on equitable shares.

“When this amount is not allocated or transferred to a municipality, the nett effect is that a municipality may not be able to render its services, implement service delivery projects, and most importantly it may not be able to run as an institution of local democracy - that its councillors may not be able to do their work, or service communities. The nett effect generally is that it cripples and paralyses the entire sphere in government, “he says.

Considering that some have regarded the decision taken by Treasury as unscrupulous, Dzengwa says there are provisions in law through the Municipal Finance Management Act that compels certain actions where a particular municipality has grossly underperformed and there are gross negligence of financial obligations. He says treasury can then step in, but that certain steps should be followed which includes consultations with local government and parliament. In this sense, equitable shares cannot be withheld without consideration for decisions taken at the budget vote.

A concern Dzengwa stipulates here is that these processes provided by law were not adequately followed by Treasury. “Hence we have raised the issue as SALGA that it is problematic in terms of how it is done. Even with all the good intentions, the nett effect will be a very negative one.”

National Treasure has ensured that the withdrawal of equitable shares will be a measure of last resort. Dzengwa says National Treasury seems to have acted “out of panic” since quite a number of municipalities have not been paying Eskom and the Water Boards.

“We do understand there is evidence to that extent. But we have raised an issue as SALGA that this debt particularly owed to Eskom, escalated after 2009, and most specifically in 3 provinces namely Mpumalanga, NorthWest and the Freestate. Now Treasury has all the instruments to monitor municipal budget and intervene.

“Why it was left for this long, that’s a questions we’ve been asking. Even when there was the intention to invoke Section 216 of the Constitution, why were proper processes not being followed? We think that there is a problem there and we also feel aggrieved as organised local government because there was never an attempt to consult us on this matter so we can jointly see what measures could be taken to avoid destructive action. We were equally surprised that the Department of Cooperative Governance was not brought into the loop regarding this arrangement,” he says.

Dzengwa says without their own generated revenue, municipalities are left with no choice but to use two other undesirable instruments which they will be punished for. The first one he mentions is for them to divert funds that are allocated for conditional grants, and use them for general services. Secondly, some municipalities have been tempted to go to their banks and borrow. This overdraft arrangement according to him creates a problem because it puts municipalities in further dire straits in terms of their finances. He says SALGA has sensitised treasury to this and there should be some monitoring to prevent municipalities from further complicating their situation out of desperation.

Dzengwa however has further concerns. “Firstly, Eskom and the Water Boards are not the only debtors that are owed by municipalities. There is a number of other entities that are owed. So if you can withhold money on the basis on these two entities, what are you saying to other entities that are owed by municipalities? So it could create a very dangerous president. Secondly, when a municipality cannot provide services, the next thing you see is local upheaval, people taking to the streets, demonstrating, burning properties etc. And it is the very same municipality that has to take responsibility for that.

“Thirdly, it could be that for poor municipalities, you only further complicate their financial state of affairs instead of helping them when you withhold their allocations without putting together concomitant programs to assist them to turn around the tide. For instance, it has been observed in some cases that the municipalities are not paying Eskom because they are buying a kilowatt of electricity from Eskom but selling it for 80 cents. Now that distorts their cash flows. Without an intervention to help them improve their cash flow and budget management practices, you are only dealing with a symptom, not with the real problem,” he says.  

Dzengwa says whenever a municipality is not able to provide services, it is the poor people who are going to suffer. When a municipality cannot put up a bridge, finish a road that it started, or provide other community service, it is the poor people by and large who are going to suffer. He says one needs to remember part of the equitable shares allocation is meant to provide for the indigents.

Looking at solutions, Dzengwa says there has to be a program developed jointly between SALGA, CoGTA and Treasury which deals comprehensively and holistically with the matter. “This is how we are going to support these municipalities to better and improve their budget management”. Withholding equitable shares is according to him only one means of intervention.

“For example, municipalities have been asked to find agreements with Eskom that says they will pay what they owe in installments over an agreed period. But even before the ink has dried on the paper, municipalities are defaulting on those agreements because they got into them when they were under pressure. We as SALGA are saying we need long term, sustainable solutions to the problem, otherwise it can’t be wise for treasury to be invoking this kind of instrument,” he says.

In terms of what communities can do about the matter, Dzengwa says broadly speaking, they have to exercise oversight when it comes to their municipalities. He stresses that councillors, as representatives of communities, must be able to ask pertinent questions.

“When the CFO has not been paying Eskom and other debtors, it has to be the councillors who ask ‘why, what is the issue?’. Communities must educate themselves about municipal financial obligations so that they are not only paying for their accounts and services but also demand more transparency and accountability,” he concludes.  

 

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