The crisis of escalating municipal overheads and inadequate local revenue bases had been recognised in 1996 when local government received enhanced Constitutional status. The principle of finance following function was supposed to ensure adequate revenue sources for the increased powers and functions and service obligations that were passed over to municipal government564 • This provided the rational for the South African Local Government Association and others to lobby for expanded municipal institutions with more staff and full-time or at least well-
paid, public representatives (councillors).
8y taking on a larger share of the (token) responsibility for meeting national poverty reduction objectives, local government became eligible for a much larger slice of national revenue.565 However In small bankrupt municipalities much of the
'equitably allocated share' of national revenue was treated as 'own revenue' rather
than being directed to the poor service consumers it was intended to subsidize. For the period February 1998 to November 1999 and for the following financial year the Auditor General noted of inter-governmental grants:
These grants are made to local governments for specific purposes. While in certain cases the grants received were not accompanied by directives from the donor department as to how the funds were to be applied, these and many of those received from the subsidisation of indigent consumers were appropriated as income. Furthermore many local authorities did not have an indigent policy which governs the subsidisation of indigent consumers.566
Under the previous municipal finance regime (limited and unreliable transfers to local government and representation based on local affordability) the internal costs of a small, poor municipality were determined by discretionary transfers from other spheres of government. Municipalities were therefore reluctant to incur recurring costs like wages and allowances where the revenue source could be
'turned off' or limited by provincial or national government. The institutional costs
of the municipality therefore increased more slowly as a response to the expanded provision of services to poor communities.
In 1996-1997 the Hamburg Transitional Local Council, illustrated this pattern. It was almost entirely reliant on transfers from the provincial government:
Grants and funding totaling R979 509 received from the Provincial
Administration represented 82,5% of the total income received by the Council.
This indicates a disproportionate reliance on Provincial Government funding and it appears that the continued operations of the Council are wholly dependent on continued support from this sourceS67
Nationally, in the same period, (1996 / 1997) a fragmented system of inter- governmental transfers to local government comprised R 1 ,2billion for agency payments, R1 ,2 billion for capital grants (excluding any receipts from the housing subsidy programme), only 2,2billion went to operating subsidies and with other non-cash subsidies the total national transfer to local government was R5,2
biliion.56B In 1997/1998 immediately prior to the implementation of the equitable
share system, the overall transfer amounted to R5,9bn. The advent of significant and constitutionally assured financial transfers (the equitable share system) in 1999 I 2000 was based on Section 227 of the South African Constitution which provided that the local sphere of government is entitled to an equitable share of nationally
raised revenue. The key policy principle is explained thus:
In other words, nationally generated income must be shared fairly between national, provincial and local government, based on the functions each has to fulfill, and the amount of revenue they are able to generate on their own.569 The equitable share transfer was supposed to ensure that local government could
" provide basic services and perform the functions allocated to i\"570. The White Paper tried to introduce the notion of revenue adequacy and certainty i.e. both their own revenue and transfer revenue should be certain and predictable to allow for realistic planning. Municipalities were encouraged to ensure that services were provided at affordable levels and that the costs of service delivery should be
No bailout will be provided to a municipality that overspends its budget and / or fails to put in place proper financial management controls. It is the responsibility of political leaders to ensure that they set realistic budgets.572
Subsidisation (the equitable share transfer) was intended to ensure that poor households, who are unable to pay even a proportion of service costs, have access to basic services. Instead the significantly increased and formula defined ES opened the door to escalated salary bills and councillor remuneration that was de-linked from local affordability.
Clearly salary increases have exceeded increases in bulk services spending over the period 1999-2003:
Table 11: Comparison of Increases: Bulk Services and Salaries 1999-2003
R Billions 1999/00 2000/01 2001/02 2002/03
Salaries 13.8 15.9 17.9 19.8
Bulk Services 13.8 14.9 13.7 15.3
Others 16.9 17.3 21.1 29.3
[Source: Intergovernmental Fiscal Review 2003J
Municipalities like Ngqushwa had battled with inadequate own revenue (even during the brief periods when tariff setting, billing and debt collection were taken seriously) and undependable and discretionary financial transfers were not.
The main reasons identified for this crisis were consumers not paying for services, and the municipality having poor facilities, like the two tractors and one refuse trailer that is in need of repair .... The revolving fund and capital accounts are in a bad state, with 80% having been spent on salaries.573
By April 2002 the analysis of Ngqushwa municipal income, as reflected in the official lOP document indicated as follows:574
Table 12: Sources of Funding Ngqushwa Municipality 2002
Source of funding Amount® %
Department of Local Govt.
(National Fiscus) 11240052 56.63
Rates and services 2057999 10.73
Consolidated Municipal
Infrastructure Proramme 3424300 17.86
Amatole District Municipality 2450000 12.78
Total 19172 351 100.00
[Source: Ngqushwa Municipality 2002, Integrated Development Plan, p 45]
Only 10.73% of municipal income was generated locally through service charges and property rates and a massive 87.27% coming as transfers from other spheres of government. This highly dependent state of the municipality does not seem to have worried the planners in any broad sense. While noting that internal generated income is very low, the lOP does not appear overly concerned by this, noting only and somewhat confusedly that " ... the need to identify other internal sources should be identified."575
The drafters of the 2002 Ngqushwa lOP chose to ignore ample evidence that in addition to spending irresponsibly, municipalities were poor debt collectors. Credit control and debt collection were treated as a 'systems' issue, the objective being to show that there was a policy in place and not that the policy was necessarily workable. In July 1998 the Hamburg TLC adopted a debt collection and indigent support policy. The debt collection policy was based on the Municipal Act 17 of 1987 and applied to rates and taxes, refuse collection, water and rentals on municipal owned property.576 The policy relies on the legal systems to deal with defaulters with the legal costs of recovering the arrears to be paid by the service consumer. 577 Having experienced similar policies at work (or more accurately not working) in a number of small Transitional Local Councils at the time, Afesis- corplan noted:
This policy is perhaps a little unrealistic for a town like Hamburg, and may have been borrowed from larger towns like East London. Needless to say that the implementation of this policy has been difficultya
Hamburg's indigent policy provided that indigent users of refuse and water services (to a value of less than R166) with a household income of less than R2500 per month would qualify for a staggered system of subsidies inversely related to the level of income:
Table 13: Services Subsidies: Hamburg Transitional Local Council 1999
Level of income ® % subsidy
0-800 70
801-1200 60
1201-2500 40
[Source: Afesis-corplan 1999; p30]
Indigent households would have to apply for this subsidy and council undertook to check a sample of the applications to verify that the households did in fact qualify. Remarking on the R166 subsidy targeted at water and refuse services, Afesis-corplan noted, "Given that only water and refuse are charged for, this is quite high."579 Despite the centrality of these issues to the Ngqushwa municipality's financial predicament, indigent policy and credit control are barely mentioned in the 2002 lOP:
Concern was expressed regarding the application of the indigent policy and assistance. The Council resolution 19 of 2001 stressed the need to amalgamate the Hamburg and Peddie indigent policies into one policy.
Credit Control Policy / Debt Control Policy: Analysis of debtors and creditors has not been properly undertaken.5ao