Abstract
Background: South African district municipalities supply, inter alia, basic social goods in order to realise socio-economic rights and promote sustainable development in their local communities. This requires adequate funding, which may be in the form of own generated revenue and intergovernmental transfers. However, despite legislated functions, many district municipalities are regarded as financially distressed and unable to deliver on their constitutional mandates.
Aim: This study sought to develop a sustainable differentiated funding model for district municipalities that will enable them to deliver on their constitutional mandates.
Methods: This empirical study followed a positivist paradigm and used questionnaires to solicit the views of selected municipal officials from all district municipalities on the efficacy of the current funding model against the key principles that underpin a successful funding framework for South African municipalities.
Results: The results of this study indicated that the funding district municipalities receive and generate is not in line with their constitutional mandates, which in turn, negatively affects their financial condition. Thus, there is a necessity to reconstruct the current funding model.
Conclusion: This study recommends a clear specification of C1 and C2 district municipal powers and functions, and that the current funding model change from applying a blanket approach and rather consider the different geographical areas and circumstances for C1 and C2 district municipalities.
Contribution: This empirical study contributes to the broader body of scientific knowledge on the local government financial governance by addressing the funding model for South African district municipalities in a practical manner.
Keywords: basic social goods; constitutional mandates; financial condition; funding model; municipal revenue; socio-economic development; South Africa; sustainable development.
Introduction and background
Chapter 1 of the Constitution of the Republic of South Africa (RSA) (1996) accords everyone the right to have their dignity respected and protected by recognising human dignity as one of the values, which the latter South African Constitution enshrines. In line with the constitutional values in chapter 1, the Bill of Rights in chapter 2 of the constitution affirms these values, by enshrining the right of every citizen, inter alia, to human dignity. Liebenberg (2005) analyses the manner in which human dignity may be used to elucidate and classify several rights in the Bill of Rights as socio-economic rights. Brand and Heyns (2005:3) aptly encapsulate the definition of socio-economic rights ‘as rights which entitle every citizen to corporeal commodities essential for them to live in’conditions consistent with human dignity’, in other words, environmental rights and the rights to education, food, healthcare, housing, social security, and water (Khoza 2007).
Encompassing socio-economic rights in the Bill of Rights asseverates the significance of corporeal conditions in human survival and development in local communities (Liebenberg 2005). According to section 7(2) of the Constitution (RSA 1996), the government is impelled to take cognisance of, preserve, advocate, and realise socio-economic rights as part of its constitutional mandate. This constitutional mandate suggests that national government bears the responsibility to take positive action, such as supplying basic social goods, which corroborates the progressive promotion of socio-economic and sustainable development, in response to the constitutional mandate on socio-economic rights (Ngang 2014). Josie (2011) asserts that municipalities, acting as representatives of national government, are the primary sites for the promotion of socio-economic and sustainable development. In other words, municipalities must plan, finance and implement programmes that will give effect to the foregoing constitutional mandates.
Although these constitutional mandates may seem realisable, in reality many municipalities are unable to fulfil them because of their poor financial condition (Mphahlele & Zandamela 2021). District municipalities are no exception. The need for, and strategic role of district municipalities was raised in March 1998 when the White Paper on Local Government was published. The 1998 White Paper contended that many boundaries have divided local communities irrationally; thus, there was a necessity to create district municipalities that would recognise the linkages between urban and rural communities (RSA 1998). Palmer (2011) identified two types of district municipalities: (1) those that do not provide bulk water services (C1) and (2) those that supply bulk water services, also known as Water Services Authorities (WSAs) (C2).
The funding model for district municipalities has received no attention and their financial predicament remained unresolved for many years (FFC 2022). For instance, in August 2021, the Department of Cooperative Governance and Traditional Affairs (CoGTA) reported eight district municipalities (18%) as being dysfunctional, indicating that five of these were under administration owing to poor governance (Financial and Fiscal Commission/FFC 2022). Furthermore, in the financial year 2018–2019, 163 South African municipalities were regarded as being financially distressed – 27 (61%) of which were district municipalities (National Treasury 2019). In line with these challenges, Mishi, Mbaleki and Mushonga (2022) latterly affirmed that district municipalities experience revenue inadequacy because of the growth in expenditure that surpasses the estimated budget and planned outlays.
This situation, together with poor financial governance, gives rise to financial deficits and ultimately, financial distress (Mishi et al. 2022). The question therefore arises: Can a sustainable differentiated funding model be developed that will enable South African district municipalities to fulfil their constitutional mandates? In reply to this question, the current empirical study sought to develop and propose a sustainable differentiated funding model for South African district municipalities that will enable them to deliver on their constitutional mandates. The following section presents the guiding theory for this study and the literature review of past studies. Thereafter, the research methodology used in the study is discussed, followed by the empirical results, and the conclusions and contribution of the study.
Theoretical framework
This study adopted the theory of the Five Capitals Model that was developed by an organisation known as the Forum for the Future, founded by the United Kingdom of Great Britain and Northern Ireland (UK) environmental guru Jonathan Porritt in 2018 (Binns 2018). The theory is based on so-called ‘capitals’ (resources), which are the elements that are needed for any sphere of government to be able to deliver sustainable public services. The concept of ‘capital’ has several different meanings. Therefore, it is useful to differentiate between the five kinds of capital: natural, human, social, manufactured, and financial capital. Firstly, these are natural capital (also sometimes referred to as environmental or ecological capital), which refers to the natural resources that are extracted from nature to be used by governments in different development activities, such as the provision of public services to local communities (Chen & Wang 2020). Secondly, human capital, which is very much a social issue. Human capital incorporates the health, knowledge, skills, intellectual outputs, motivation, and capacity for relationships of individuals (Chen & Wang 2020). In the absence of a suitably educated and trained workforce, for example, it will be impossible for most governments to function. Thirdly, capital is social capital, which refers to the resources and capabilities derived from the structures, relationships, and networks that government is linked to. Social capital influences information exchange and sharing, as well as the sharing of facilities and resources (Binns 2018; Chen & Wang 2020; Klinz 2011). Fourthly, capital is manufactured capital. Binns (2018) argues that it is pointless for government to have raw materials from nature, a well-trained and healthy workforce, and structures in place to communicate, if they do not have quality goods and the infrastructure needed to turn the raw materials into a product. Fifthly, capital is financial capital, which is related to the actual physical liquid cash and how it is used in the implementation of different government projects (Mhlanga 2019). It is therefore that financial condition is measured by the extent to which government managers can continuously accomplish their activities, such as the supply of basic social goods, without exhausting the existing financial resources. The concept of ‘financial condition’ has been observed by Wang, Dennis and Tu (2007) to have four associated dimensions of solvency, namely cash solvency, budget solvency, long-run solvency, and service-level solvency.
Mhlanga (2019) maintains that one of the captious determinants that strongly influences the enhancement of financial conditions in governments, which is a financial capital aspect, is the linkage of the notion of financial condition to the concept of sustainable development. According to Binns (2018), the definition of sustainable development was first developed by Gro Harlem Brundtland in 1987 in the publication ‘Our common future’, and although 1987 is a fair way back, it still holds true today. Essentially this definition looks at ‘needs’ as consisting of three factors that have to be balanced both now and, in the future, – social, environmental, and economic factors. For example, there cannot be a strong economy without considering the living standards of people and causing widespread environmental destruction in local communities. At some point in the future, such local communities would not be able to function, meaning that such an economy would not be sustainable. In the South African context, an unsustainable local community would also be a violation of the provisions made in chapter 1 of the Constitution (RSA 1996), such as human dignity, the achievement of equality and the advancement of human rights and freedoms. In the theory of Five Capitals Model, it is repeatedly stated that sustainable development is determined by the extent to which a government can execute several different programmes, such as the supply of basic social goods, without debilitating the source of capital.
Literature review
A considerable amount of literature argues that the current funding model for South African district municipalities is not responsive to their constitutional mandates. This is because there are differences between the district municipalities’ available financial resources and the actual expenditure requirements (Chauke 2016; Chitiga-Mabugu & Monkam 2013; Glasser & Wright 2020; Maphalla 2015; Mhlanga 2019). Enwereji and Potgieter (2018) confirm that these differences within the funding model are expanding because the self-generated municipal revenue of some South African district municipalities has declined.
District municipalities are mandated by the constitution to provide basic social goods required for the promotion of socio-economic and sustainable development in local communities. This study only focusses on the basic social goods that pose a threat to human dignity if not provided, which directly affect the quality of life, namely electricity, sanitation, waste removal, and water. The aggregated municipal revenue found within the funding model for district municipalities is intended to finance their operational and capital aggregated expenditure and to provide basic social goods. The municipal revenue-raising arrangements for district municipalities have been sourced through: (1) service charges, (2) former RSC levies, and (3) receiving intergovernmental transfer grants from national and provincial governments.
Service charges constitute a significant source of municipal revenue-raising arrangement of about 20% (on average) in South Africa (FFC 2022). Intergovernmental transfer grants are the primary source of about 75% (on average) of the municipal revenue-raising arrangements (FFC 2022). External sources available for district municipalities to finance municipal infrastructure is borrowing from the financial markets, which finances almost 5% on average of district municipalities’ budgets (Chitiga-Mabugu & Monkam 2013).
District municipalities receive their equitable share transfer to fund the supply of municipal health services (Ajam et al. 2021; Nzama 2019). This absence in municipal revenue generation capacity, however, makes them significantly dependent on intergovernmental transfer grants as their primary source of revenue. Currently, the Regional Services Council (RSC) levy replacement grant is funding almost 25% of district municipalities’ budgets (FFC 2022). The RSC levy replacement grant was introduced in 2006 as a temporary replacement of the RSC and Joint Services Board levies that were abolished in June 2006. Although the grant was established as a temporary measure while a suitable replacement was being sought, it has lasted for longer than many subsequent intergovernmental grants. The RSC levy replacement grant has been criticised for exhibiting glaring biases in the manner that it is allocated and distributed across C1 and C2 district municipalities because the allocation and distribution are not objective. The allocation is primarily based on the amount of levy income district municipalities were raising at the time of the RSC levies (Palmer 2011).
Therefore, the funding model for South African district municipalities is not responsive to the constitutional mandates, especially with regard to the RSC levy replacement grant, because it is based on a historical aspect that does not cater for the different contemporary realities of district municipalities. Thus, the allocation is not driven by any objective or modern criteria.
De Villiers (2008) and the United Nations Development Programme (UNDP 2012) point out several key principles that underpin a successful funding framework for South African municipalities, with only four being particularly relevant to district municipalities: (1) effective decentralisation and local independence require appropriate fiscal autonomy, (2) the funding of district municipalities must be in line with their constitutional mandates to safeguard their financial condition, (3) all functions assigned by national and provincial government to district municipalities must be accompanied by the necessary funding based on full and fair costing and (4) the intergovernmental transfer grants from national and provincial government to district municipalities must be unconditional and not aimed at any one project only.
Aswanth-Kumar (2014), Kumar and Reddy (2019), Mbandlwa, Dorasamy and Fagbadebo (2020) and Mditshwa (2020) argue that some of the foregoing key principles have not been adopted, as district municipalities are not receiving an equitable share of national revenue commensurate with their constitutional mandates. Mello (2018) and Munzhedzi (2020) are in congruence with the view held by the above-mentioned scholars that most district municipalities are not performing their constitutional mandates at the required level expected by legislation, because of their current funding model. Therefore, the adequacy of the funding model for district municipalities is a concern.
Research methods and design
Research methodology is the ‘methods, techniques and procedures that are employed in the process of executing the research design’ (Babbie & Mouton 2001:647). This study followed a positivist paradigm, with a quantitative research design, using descriptive correlational analysis to develop and propose a sustainable differentiated funding model for South African district municipalities that will enable them to deliver on their constitutional mandates. Williams (2007) posits that the descriptive correlational research design is a general plan employed to examine a situation as it exists in its current state. This research design involves identifying the attributes of a particular phenomenon (current funding model) based on an observational basis or the exploration of correlation between two or more phenomena.
Sample selection
The population consisted of 44 district municipalities, which is a representative sample of 100% of the district municipalities throughout all nine provinces in South Africa. The researcher designed the self-administered questionnaire, which consisted of close-ended questions and one open-ended question and sent them electronically to 44 targeted participants (accounting officers and chief financial officers [CFOs]) who were purposefully selected because they were believed to be knowledgeable and were directly involved with the funding model for the district municipalities.
Data collection and analysis
The questionnaire had five sections.
Section A focussed on the demographic profile of the research participants, such as their highest level of qualification, their position in the district municipality, and their time in service. This provided a picture of the respondents.
Section B aimed to establish the research participants’ perceptions regarding the funding framework for South African municipalities. The participants were required to rate the selected four statements: (1) effective decentralisation and local independence require appropriate fiscal autonomy, (2) the funding of district municipalities must be in line with their statutory obligations to safeguard their financial condition, (3) all functions assigned by national and provincial government to district municipalities must be accompanied by the necessary funding based on full and fair costing, and (4) the intergovernmental grants transfer from national and provincial government to district municipalities must be unconditional and not aimed at any one project only. A five-point Likert-type scale was used, as follows: 5 (extremely relevant), 4 (very relevant), 3 (of moderate relevance), 2 (of little relevance), and 1 (not relevant).
In section C of the questionnaire, the research participants’ perceptions of the current funding model for South African district municipalities were sought. Accordingly, the research participants were asked to indicate their agreement or disagreement with different assertions regarding the abolishment of the RSC levies, dependency on intergovernmental transfer grants, financial challenges faced by district municipalities, the municipal revenue-raising arrangements, inadequate revenue sources, the RSC levy replacement grant, and the efficacy of the entire funding model for district municipalities. Again, a five-point Likert-type scale ranging from 5 (strongly agree) to 4 (agree), 3 (neutral), 2 (disagree), and 1 (strongly disagree) was used. The objective of this section was to find evidence that supported or refuted the arguments in the literature review about the current funding model for district municipalities being non-responsive to their constitutional mandates.
In section D of the questionnaire, the research participants’ perceptions regarding the solvency factors (cash, budget, long-run, and service level) that could affect the efficacy of the funding model for district municipalities were sought. Accordingly, the participants were asked to rate the components of the four dimensions of solvency associated with the current funding model for district municipalities. The components are the equitable share (unconditional grant), RSC levy replacement grant (unconditional grant), conditional grants, total expenditure requirements, other expenditure, total income excluding grants, special support for councillor remuneration and ward committees’ conditional grant (conditional grant), total debts (liabilities), remuneration for employees and remuneration for councillors. Again, a five-point Likert-type scale ranging from 5 (extremely relevant) to 4 (very relevant), 3 (of moderate relevance), 2 (of little relevance), and 1 (not relevant) was used. The objective of this section was to comprehend the extent to which the solvency factors may have an impact on the efficacy of the current funding model for district municipalities.
Contrary to the foregoing sections, section E of the questionnaire was an open-ended question, which afforded the research participants an opportunity to provide additional comments and/or suggestions on the funding practices of district municipalities. These suggestions could be used by the researcher to make recommendations for a newly reconstructed funding model for South African district municipalities.
Out of the 44 research participants, 34 (77.3%) completed and returned the questionnaires. The Statistical Software (STATA): Release 16 by StataCorp LLC in USA, was used to analyse and interpret the responses in sections B, C, and D. Nevertheless, prior to analysing the data from the questionnaires, the researcher exercised quality control by preparing and capturing the data on Microsoft Excel spreadsheets. Subsequently, the researcher imported the documents into the STATA software for coding and ultimately data analysis.
Ethical considerations
Ethical clearance to conduct this study was obtained from the University of South Africa College of Accounting Sciences Research Ethics Review Committee (No. 2022_CAS_031).
Empirical results and discussion
This section presents the descriptive statistics of the variables used in the analysis, the correlation coefficients, and the derived results.
Data management, validity, and reliability test
Construct validity was obtained by formulating self-administered questionnaires from the reviewed literature. The questionnaire was submitted to the Unisa College of Accounting Sciences’ research ethics review committee (RERC) for approval, prior to distribution thereof to the research participants. Validity was further maintained by ensuring that the questionnaires were administered only to accounting officers, chief financial officers (CFOs) or senior financial managers in the 44 district municipalities who are believed to possess specific characteristics that are of relevance to the study.
The study data management involved relabelling the questions and recoding the selected options between 1 and 5 to 0 and 4, which is categorical and more appropriate for the analysis. Prior to the analysis of the questionnaire, a reliability test was conducted. From the population, a sample of 34 observations was used. A reliability test was conducted to examine the consistency of the respondents in each variable, using Cronbach’s alpha. The reliability test shows greater consistency as the scale reliability coefficient moves close to 1. In this case, the value was 0.8087. The items that had a negative sign were omitted. The negative sign might be explained by outliers and using Cronbach’s alpha reliability test to identify responses that may not be reliable (see Table 1–A1).
Study variables
The only independent variable for this study was the question in the questionnaire, which required the research participants to indicate the status of their district municipality (DM) – a C1 or a C2. The dependent variable was constructed from a series of five Likert-type scale questions to form a financial condition variable. The histogram of the outcome variable of the funding model for C1 and C2 district municipalities is shown in Figure 1. From the information in Figure 1, it is evident that they are not the same.
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FIGURE 1: Histogram of the funding model for: (a) C1 and (b) C2 district municipalities. |
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Construction of financial condition and funding model
A multiple correspondence analysis (MCA) was used in the study to generate an index of cash solvency, budget solvency, long-run solvency and service-level solvency, as well as the current funding model index, from categorical variables. While the MCA is appropriate for the construction of categorical variables, principal component analysis (PCA) is appropriate for the continuous variable (Adediran, Fakoya & Sikhweni 2021). Furthermore, a financial condition index was created from the set of continuous variables using PCA. The results of the MCA outcomes were divided into two sections. The first section revealed that the normalised principal inertia, and the cumulative percentage is 97.82 at the first dimension. The second section presented the coordinate column under the first dimension as negative (see Table 1–A2 for the MCA and PCA output). However, to correct the error of the negative sign in the coordinate column, the predicted index was multiplied by minus one (-1) to get the appropriate outcome (see Table 1). Therefore, the mean and the standard deviation of the index generated were zero and one, respectively.
Table 1 presents the summarised statistics of the key variables. All the variables were continuous after the creation of indices, except for the district municipality status, which was categorical. The financial condition had a minimum and maximum of –1.44 and 0.74, respectively. The funding model variable had a minimum of –0.51 and a maximum of 1.04.
Section A analysis
Table 2 presents a summary of the demographic information of the research participants.
| TABLE 2: Demographic information of the research participants. |
As Table 2 indicates, 24% of the research participants held a higher diploma or first degree, followed by an honours degree (38%), and master’s degree (26%). The remainder of the research participants held doctoral degrees (12%). This suggests that the research participants included in the study had tertiary educational backgrounds and were able to provide reliable information about the current funding model for district municipalities and its responsiveness to their constitutional mandates. Furthermore, the majority (62%) of the research participants included in the study were accounting officers (also referred to as municipal managers), followed by CFOs (38%). This implies that the research participants included in this study had relevant expertise and the information they provided could be considered reliable.
However, it is important to observe that no other senior financial managers participated in this study. Table 2 also indicates that the majority of the research participants 15 (44%) were in service for between 11 years and 20 years, followed by 11 (32%) of the research participants who had between 21 years and 30 years of service, and 8 (24%) who had between 0 years and 10 years of service. This indicates that the research participants were experienced and had the skills and expertise to provide reliable information.
Sections B to D analysis
Table 3 presents the funding model and financial condition, using paired t-testing, for South African district municipalities.
| TABLE 3: Funding model and financial condition using a paired t-test. |
Both the funding model and the financial condition of district municipalities were considered from the responses of the research participants. A paired t-test was used to investigate the relationship between the financial condition and funding model of each district municipality. The results indicate the differences in the values of the financial condition and funding model of the district municipalities and examine if the mean of these differences is equal to zero. The t-statistic was 1.17, with a df of 33. The findings show that the mean difference between the financial condition and funding model is 0.21, which is different from 0. The probability (p-value) of the paired t-test was 0.89. These results imply that there is a difference between the funding model and the financial condition of South African district municipalities. Undoubtedly, this is evidence that the current funding model for South African district municipalities is not responsive to their constitutional mandate.
Furthermore, we tested whether there is a significant difference in the financial condition between C1 and C2 district municipalities. Table 4 presents the findings.
| TABLE 4: Financial condition of C1 and C2 district municipalities using a two-sample t-test with equal variances. |
A two-sample t-test with equal variances was used, comparing the mean of the variable between the two statuses (C1 and C2) of the district municipalities. The study compared the means of the financial conditions of the C1 and C2 district municipalities. The mean of C1 district municipalities is negative (–0.022), and the mean of C2 district municipalities is positive (0.025). The difference between the C1 and C2 district municipalities is –0.048. The t-statistic is –0.14 and the degrees of freedom is 32. The corresponding two-tailed p-value is 0.892, which is greater than 0.05. The difference in means of financial condition between the C1 and C2 district municipalities is different from 0. The result reveals that there is a difference in the financial conditions of C1 and C2 district municipalities.
Moreover, the study investigated whether there is a statistically significant difference in the funding models of C1 and C2 district municipalities. Table 5 presents the results.
| TABLE 5: Financial model of C1 and C2 district municipalities using a two-sam | |
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