Understanding the impact of financial sustainability on South African municipalities

Abstract

This article acknowledges the lack of skills and poor financial governance within South African municipalities but argues that these factors are an insufficient explanation of their increasing fiscal distress, which was found at over 90% by 2016. It employs the concept of financial condition to construct an econometric function for South African local government. This financial condition function confirms that the fiscal framework of South African local government is distressed. The article further concludes that as service delivery improves, so does the fiscal distress. This applies even to municipalities that receive audit outcomes without material findings. As an illustration, the article uses the collective debt incurred by municipalities to Eskom – the energy utility company. The article argues that it is mathematically impossible to settle this debt within the current local government fiscal framework. The conclusion confirms the importance of constructing the financial condition function as an enabler for improved local government financial health.