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THE CONCEPTUAL ANALYSIS OF FINANCIAL VIABILITY
Different authors have different perspectives on the concept of financial viability. Ramphele (2008:1) defines financial viability as the availability and sustainability of revenue sources. Accordingly, the concept financial viability is characterised by availability, viability, and revenue base. Tonderai and Felix (2015:2) assert that financial viability refers to being able to generate sufficient income to meet operating expenses, debt commitments, and, where relevant, to allow growth while maintaining service delivery levels.
According to Lusthaus, Adrien, Anderson, Carden and Mantalvan (2002:142), financial viability is the ability of an organisation to raise the funds required to meet its financial obligations in the short, medium, and long term. Financial viability is essentially about being able to generate sufficient income to meet operational payments, debt commitments, and to allow growth while maintaining service levels. To solve the conceptual confusion that surrounds the concept of financial viability, the definition provided by National Treasury (2017:3) can be used as point of departure for this study, namely that financial viability refers to the sustainability of municipal budgets, and whether a municipality can sustainably meet its expenditure commitments from its own revenues and transfers.
DEMARCATION FOR FINANCIAL VIABILITY OR MERE REORGANISATION OF MUNICIPALITIES
In 2002, financial viability became a demarcation issue after the Presidential Coordinating Council passed several resolutions on local government; including the need to build financially viable municipalities. Ncube and Monnakgotla (2016:79)
explain that the issue of financial viability is not new but has still not been resolved many years after developing local government.
Ncube and Monnakgotla (2016:75) contend that the merging of financially non-viable municipalities in rural areas, which depend heavily on grants, is not going to assist them to fulfil their constitutional mandate. “The 2016 demarcation was partly motivated by the desire to eliminate dependency and improve municipal functionality” (Ncube & Monnakgotla 2016:75). Municipalities that depend on government grants are financially unviable and this problem can be addressed through demarcation, which is redrawing the boundaries to roughly even out revenue bases.
Ncube and Monnakgotla (2016:77) comment that the notion of a viable municipality comes from the era of WLAs. The WLAs were viable in the sense that they were self-sufficient. They had tax bases (property taxes and fees) and relied entirely on own revenues, but served only a small sector of the population. Ncube and Monnakgotla (2016:86) further claim that it is unlikely that rural municipalities can be self-sufficient and will always be dependent on transfers from the national and provincial government.
Ncube and Monnakgotla (2016:91) believe that municipal boundary demarcation will not make many municipalities viable, or self-sufficient and self-reliant. They maintain that more focus should be on increasing or developing tax bases through economic development rather than demarcating municipalities. Ncube and Monnakgotla (2016:91) also recommend that the funding model for rural municipalities should allow for the existence of municipalities with low revenue bases rather than forcing demarcation. The funding model should differentiate among rural municipalities in terms of their revenue base. Ncube and Monnakgotla (2016:93) conclude that to achieve financial viability, the government should focus on increasing or developing tax bases through economic development rather than merging municipalities.
Cameron and Milne (2013:17) assert that smaller municipalities with populations under 20 000 people are said to be financially unviable. Cameron and Milne (2013:17) further point out that there is a balanced decline in the number of local municipalities in financial distress in the larger populations. Regarding financial management and audit reports, bigger municipalities perform better than smaller municipalities (Cameron & Milne 2013:18).
Kanyane (2011:940) states that the viability of municipalities, especially rural ones, can be affected by their inability to generate revenue and consequently these municipalities could be stripped of some of their powers. To illustrate this point further, on 23 June 2015 the Mutale Local Municipality in the Vhembe District Municipality was disestablished and its portions incorporated into the areas of the Thulamela and Musina local municipalities (MDB 2015a). One of the reasons for the municipal demarcation was in preparation for the August 2016 local government election due to poor financial management and lack of revenue. The argument is that most of the municipalities in the Vhembe District Municipality are rural and ultimately, by being rural, their revenue collection rate tends to be less, because most of their households do not pay for services. Kanyane (2011: 940) validates the low revenue base of rural municipalities and argues that it is due to limited resources.
Criteria to measure the financial viability of municipalities
Ramphele (2008:3) states that for a municipality to be considered financially viable, it should:
demonstrate the proven ability to provide the necessary services and infrastructure to its communities;
create a sustainable local economic development programme conducive for its communities to thrive;
possess the requisite institutional capacity necessary to perform municipal functions and exercise powers and functions;
budget adequately, manage financial resources, and prudently grow the revenue base; and;
create productive public participation in initialising, planning, and executing municipal projects.
On the other hand, Tonderai and Felix (2015:3) suggest that there are several ratios that provide a broader view of the financial position of a municipality. These ratios measure the following: analysis of the income statement of the rate of the general service, analysis of the income statement of the service, percentage and net surplus (or deficit) for all services, analysis of the appropriation section of the income statement, and analysis of the cash flow statement.
Coutinho (2010 in Tonderai & Felix 2015:4) observes that another way that can be used by municipalities to ensure that they remain financially viable is to ensure that consumers pay for the services they receive. Municipalities provide services to consumers on credit, and then send a statement at the end of the month, hoping that consumers will fulfil their obligation of paying for the services from which they have benefited. Measuring how much revenue is tied up in consumers is important as it shows how financially viable a council is. Municipalities calculate this ratio as consumer debt to total income.
In Phatudi’s (2010:21) view, there are three dimensions to assess the financial viability of a municipality. The first dimension relates to the ability of a municipality to generate sufficient cash to pay its debts, and this refers to both short-term and long-term cash flow requirements. Phatudi (2010:21) explains that resources are generated through an organisation’s ability to create, supply, and deliver products, services, and/or programmes that are useful to customers, clients, or beneficiaries. Phatudi (2010:22) argues that organisations that are unable to meet their short-term obligations present a risk to their creditors, those to whom they provide services, and the people working for the organisation.
The second dimension of assessing financial viability deals with the sources and types of revenues on which an organisation bases its costs. Conventionally, in local municipalities, particularly rural-based municipalities, as echoed by Kanyane (2011:940), their main source of revenue is anticipated from grants and subsidies. The concern addressed by this dimension is the reliability of the flow of funds. With respect to municipalities, the diversity and reliability of different funding sources need to be analysed. Phatudi (2010:22) believes that organisations that rely on a single funding source encounter more difficulties than organisations with multiple, reliable funding sources.
The third dimension is the ability of an organisation to stay within its allocation. Phatudi (2010:22) challenges whether an organisation is able to manage within its revenue sources without creating a deficit. This dimension focuses on the actual ability to manage a budgeting process, as well as the results of the process. It should be noted that financial viability depends on good financial management practices. This practice is applicable to both private and public sector organisations (Phatudi 2010:22).
Lusthaus et al. (2002:126) comment that in a general sense, an organisation is financially viable if it generates enough value (both internally and from external sources) to keep stakeholders committed to the organisation’s existence. Phatudi (2010:22) states that for many public institutions, staying financially viable depends crucially on management’s ability to maintain existing linkages or create new ones to ensure a continued flow of funds over time from diverse sources. Lusthaus et al. (2002:127) further suggest that the starting point of the assessment of an organisation’s financial viability is to review the organisation’s financial statements. This procedure is simple for private and not-for-profit sector organisations that involve reviewing income and expense statements over several years, together with the balance sheet and cash flow statements.
It should be noted that these documents generally provide most of the information required. In assessing financial viability, lists of accounts receivable and actual contracts should be requested. Arguably, both provide insight into the future diversity of funding sources and cash flow schedules (Lusthaus et al. 2002:127).
Lusthaus et al. (2002:126) identify the following as indicators of financial viability through which most organisations are assessed:
ratio of largest funders to overall revenues – the ratio of the largest funders over revenues is calculated as follows: largest revenue source / overall revenue;
ratio of cash to overdue revenues – the ratio is calculated as follows: deferred revenue / (cash + savings) or temporary restricted net assets / (cash+savings);
ratio of current assets to current liabilities – current assets / current liabilities; ratio of total assets to total liabilities – total liabilities divided by total assets; and
human resource (HR) capability and the percentage of personnel costs over the entire operating budget.
It is important to consider the effect of salary expenditure on local and national economic growth, and being prepared to fund increases themselves as the national government continues to emphasise consumption spending (Phatudi 2010:21). Phatudi (2010:22) explains that National Treasury prescribes that municipalities should not spend more than 33% of their total budgets on operational costs and salaries. Ngwenya and Majam (2011:174) suggest that there are six ratios for assessing the financial viability of municipalities. They are discussed in the following subsections.
Liquidity
The liquidity of an organisation is measured by its ability to satisfy its short-term obligations as they become due. Liquidity answers the question of whether the institution is likely to meet its financial obligation on a timely basis. Ngwenya and Majam (2011:174) state that municipalities must also maintain a certain level of liquidity to continue providing uninterrupted services to the community.
Leverage
As far as financial management is concerned, leverage (also known as gearing or levering) refers to the use of debt to supplement investment. It refers to the degree to which an investor or institution utilises borrowed money. Ngwenya and Majam (2011:174) explain that government institutions’ debt can become a burden to tax payers. The higher the debt, the more the budget must be devoted to interest and debt principal payments.
Table of contents :
DECLARATION
LIST OF FIGURES
LIST OF TABLES
LIST OF ABBREVIATIONS
PROOFREAD LETTER
DEDICATION..
ACKNOWLEDGEMENTS
ABSTRACT
CHAPTER 1: INTRODUCTION
1.1 BACKGROUND AND RATIONALE FOR THE STUDY
1.2 PROBLEM STATEMENT
1.3 RESEARCH QUESTIONS
1.4 RESEARCH OBJECTIVES
1.5 RESEARCH METHODOLOGY
1.5.1 Research design
1.5.2 Research methodology
1.5.3 Vhembe District Municipality case study approach
1.5.3.1 Survey
1.5.4 Target research population and sampling
1.5.5 Data and information collection
1.5.6 Data analysis
1.6 RATIONALE FOR THE STUDY
1.7 CLARIFICATION OF SPECIFIC TERMS AND CONCEPTS
1.8 CHAPTER OUTLINE
1.9 ETHICAL CONSIDERATIONS OF THE STUDY
1.9.1 Informed consent
1.10 CONCLUSION
CHAPTER 2: LITERATURE REVIEW ON MUNICIPAL BOUNDARY DEMARCATION IN SOUTH AFRICA
2.1 INTRODUCTION
2.2 HISTORICAL BACKGROUND OF DEMARCATION IN SOUTH AFRICA
2.2.1 Segregation and apartheid local government in South Africa
2.2.2 White Local Authorities (WLAs) and financial viability
2.2.3 Local government reform in South Africa
2.3 THE CONCEPTUAL ANALYSIS OF FINANCIAL VIABILITY
2.4 DEMARCATION FOR FINANCIAL VIABILITY OR MERE REORGANISATION OF MUNICIPALITIES
2.4.1 Criteria to measure the financial viability of municipalities
2.4.1.1 Liquidity
2.4.1.2 Leverage
2.4.1.3 Ability to provide basic services
2.4.1.4 Financial performance
2.4.1.5 Extent of dependence on income from national government
2.4.1.6 Revenue tied up in debtors
2.4.2 Is financial viability the only factor in demarcation matters?
2.5 ENCOURAGE PUBLIC PARTICIPATION IN DEMARCATION MATTERS
2.5.1 The role of the community involvement in public participation
2.5.2 How public participation influences demarcation
2.5.3 The role of local government in public participation
2.5.4 The benefits of public participation
2.5.5 The reason why public participation fail?
2.5.6 Institutional complexity associated with public participation
2.6 DEMARCATION FOR PROTESTS OR SERVICE DELIVERY
2.6.1 Batho Pele principles as the cornerstone of service delivery
2.6.2 How the Constitution shapes service delivery
2.6.3 Are community protests linked to service delivery?
2.6.4 The role of traditional leadership in fostering service delivery
2.7 INTERNATIONAL EXPERIENCE ON THE IMPACT OF MUNICIPAL BOUNDARY DEMARCATION ON FINANCIAL VIABILITY
2.8 PAST DEMARCATION EXPERIENCE IN SOUTH AFRICA: LESSONS LEARNED
2.9 CONCLUSION
CHAPTER 3: FINANCIAL MANAGEMENT AND PERSPECTIVES OF MUNICIPAL DEMARCATION: A THEORETICAL OVERVIEW
3.1 INTRODUCTION
3.2 BASIC OVERVIEW OF MUNICIPAL FINANCIAL MANAGEMENT PRINCIPLES
3.2.1 Five Municipal Finance Management Act (MFMA) financial management principles
3.2.2 Department of Planning, Monitoring and Evaluation (DPME) standards
3.2.2.1 Effective budget planning and management
3.2.2.2 Management of unauthorised, irregular, fruitless, and/or wasteful expenditure
3.2.2.3 Revenue management
3.2.2.4 Supply chain management (SCM)
3.2.2.5 Financial delegations
3.3 THE SIGNIFICANCE OF FINANCIAL MANAGEMENT
3.3.1 Financial statement analysis
3.3.1.1 Income statement
3.3.1.2 Position statement
3.3.1.3 Statement of changes in owner’s equity
3.3.1.4 Statement of changes in financial position
3.3.2 Types of financial statement analyses
3.3.2.1 Based on the material used
3.3.2.2 Based on the method of operation
3.3.3 Techniques of financial statement analysis
3.3.3.1 Comparative statement analysis
3.3.3.2 Trend analysis
3.3.3.3 Common size analysis
3.3.3.4 The funds flow statement
3.3.3.5 The cash flow statement
3.3.3.6 Ratio analysis
3.4 THE PRINCIPLES OF SUCCESSFUL PUBLIC PARTICIPATION
3.4.1 Clarify the goals for and the level of public participation
3.4.2 Identify where public input can influence the decision
3.4.3 Develop and share meaningful information
3.4.4 Engage a broad range of stakeholder interests
3.4.5 Design a comprehensive participation process
3.4.6 Ensure sponsor commitment
3.5 THE PRINCIPLES OF GOOD GOVERNANCE IN THE 21ST CENTURY
3.5.1 Legitimacy and voice
3.5.2 Direction
3.5.3 Performance
3.5.4 Accountability
3.5.5 Fairness
3.6 THEORETICAL APPROACHES TO DEMARCATION
3.6.1 The ability-to-pay theory
3.6.2 The public participation theory
3.6.3 The governmentability theory
3.6.4 The governance theory
3.7 CONCLUSION
CHAPTER 4: LEGISLATIVE AND REGULATORY FRAMEWORKS THAT UNDERPIN MUNICIPAL BOUNDARY DEMARCATION IN SOUTH AFRICA
4.1 INTRODUCTION
4.2 THE 1996 CONSTITUTION OF THE REPUBLIC OF SOUTH AFRICA
4.3 NATIONAL DEVELOPMENT PLAN (NDP): VISION 2030
4.4 THE 1998 WHITE PAPER ON LOCAL GOVERNMENT
4.5 THE 1997 WHITE PAPER ON TRANSFORMING PUBLIC SERVICE DELIVERY (BATHO PELE WHITE PAPER)
4.6 THE 2005 INTERGOVERNMENTAL RELATIONS FRAMEWORK ACT
4.7 THE MUNICIPAL STRUCTURES ACT OF 1998
4.7.1 Establishment of municipalities
4.7.2 Repeal, amendment, or replacement of section 12 notices when boundaries are redetermined
4.7.3 Cross-boundary municipalities
4.7.4 Delimitation of wards
4.7.5 Delimitation criteria
4.7.6 Publication of delimitation
4.8 THE MUNICIPAL SYSTEMS ACT OF 2000
4.9 THE DEMARCATION ACT OF 1998
4.10 THE SPATIAL PLANNING AND LAND USE MANAGEMENT ACT (SPLUMA) OF 2013
4.11 THE MFMA OF 2003
4.12 THE MUNICIPAL ELECTION ACT OF 2000
4.13 THE TRADITIONAL LEADERSHIP AND GOVERNANCE FRAMEWORK AMENDMENT ACT OF 2003
4.14 THE DEVELOPMENT FACILITATION ACT OF 1995
4.15 THE MUNICIPAL PROPERTY RATES ACT OF 2004
4.16 THE DISASTER MANAGEMENT ACT OF 2002
4.17 THE DIVISION OF REVENUE ACT OF 2017
4.18 CONCLUSION
CHAPTER 5: RESEARCH METHODOLOGY AND DATA COLLECTION
5.1 INTRODUCTION
5.2 RESEARCH PHILOSOPHIES, APPROACHES, STRATEGIES, DESIGNS, AND CHOICES
5.2.1 Research philosophies
5.2.1.1 Positivism
5.2.1.2 Interpretivism
5.2.2 Research approaches
5.2.3 Research strategies
5.2.3.1 Case study
5.2.3.2 Survey
5.2.4 Research methodological choices and designs
5.2.4.1 Mixed-methods categorisation
5.2.4.2 Rationale for utilising the mixed-methods approach
5.3 SAMPLING METHOD
5.3.1 Probability sampling
5.3.1.1 Simple random sampling
5.3.1.2 Systematic sampling
5.3.1.3 Stratified sampling
5.3.1.4 Cluster sampling
5.3.1.5 Multi-stage sampling
5.3.2 Non-probability sampling
5.3.2.1 Purposive or judgemental sampling
5.3.2.2 Convenience sampling
5.3.2.3 Snowball sampling
5.3.2.4 Quota sampling
5.3.2.5 Sequential sampling
5.3.3 Sample size
5.3.3.1 Justification for the sample size
5.4 THE PROFILE OF LIMPOPO PROVINCE AND HOW BOUNDARY DEMARCATION AFFECTED THE PROVINCE
5.4.1 North West and Limpopo provinces
5.4.2 Mpumalanga and Limpopo provinces
5.4.3.1 The profile of Thulamela Local Municipality
5.4.3.2 The profile of Makhado Local Municipality
5.5 DATA-COLLECTION PROCEDURE
5.5.1 Questionnaire
5.5.2 Semi-structured interviews
5.5.3 Vhembe District Municipality and Thulamela and Makhado local municipalities’ documents
5.6 DATA ANALYSIS AND VALIDATION PROCEDURES
5.6.1 Processes involved in quantitative data analysis
5.6.2 Processes involved in qualitative data analysis
5.6.3 Processes involved in mixed-methods data collection and analysis for this study
5.6.3.1 Mixed-methods data-collection procedure
5.6.3.2 Mixed-methods data-analysis process
5.6.3.3 Mixed-methods data-interpretation process
5.7 TRIANGULATION IN THIS STUDY
5.8 INTERNAL AND EXTERNAL VALIDITY, RELIABILITY OF THE FINDINGS, AND TRUSTWORTHINESS OF THE STUDY
5.8.1 Internal validity of the research design
5.8.2 External validity of the research design
5.8.3 Reliability
5.8.4 The trustworthiness of the study
5.9 THE FOCUS OF THE RESEARCH AND THE LIMITATION OF THE STUDY
5.10 ETHICAL CONSIDERATIONS
5.11 CONCLUSION
CHAPTER 6: DATA INTERPRETATION AND ANALYSIS OF FINDINGS
6.1 INTRODUCTION
6.2 QUESTIONNAIRE
6.2.1 Section 1: Biographical data (Community/household respondents)
6.2.1.1 Vuwani area
6.2.1.2 An overall depiction of the participants’ characteristics
6.2.1.3 Malamulele area
6.2.2 Section 2: Investigation of the causes of demarcation disputes in the Vuwani and Malamulele areas
6.2.3 Investigation of the extent to which villagers were consulted in the demarcation process
6.2.4 Section 3: Evaluation of the level of service provision and possible challenges in the Vhembe District Municipality
6.2.5 Section 1: Biographical data (municipal officials)
6.2.6.1 The municipalities’ ability to generate enough cash to pay their debts
6.2.6.2 The municipalities’ ability to stay within their allocation
6.2.6.3 The municipalities’ ability to manage within their revenue sources without creating a deficit
6.2.6.4 Does the municipalities earn interest
6.2.6.7 Whether the municipalities charge residents for refuse removal
6.2.6.8 Whether the municipalities charge the residents municipal rates
6.2.6.9 Whether the municipalities charge the residents for water provision
6.2.6.10 Whether the municipalities charge for sewage and sanitation
6.2.6.11 Whether the municipalities charge for the provision of electricity
6.2.6.12 The municipalities’ ratio of cash to overdue revenue
6.2.6.13 The municipalities’ ratio of current assets to current liabilities
6.2.6.14 The municipalities’ ratio of total assets to total liabilities
6.2.6.15 The municipalities’ human resource (HR) capability and the percentage of personnel costs over the entire operating budget
6.2.6.16 The municipalities’ sources and types of revenues
6.3 OVERALL RESEARCH ANALYSIS AND FINDINGS OF THE STUDY
6.3.1 Findings: Objective 1: The investigation of the causes of demarcation disputes in the Vhembe District Municipality
6.3.2 Findings: Objective 2: The investigation of the extent to which the villagers were consulted in the demarcation decision process
6.3.3 Findings: Objective 3: Evaluation of the level of service provision and possible challenges in the Vhembe District Municipality
6.4 CONCLUSION
CHAPTER 7: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
7.1 INTRODUCTION
7.2 CONCLUSIONS
7.3 RECOMMENDATIONS
7.3.1 Recommendations for the national Department of Co-operative Governance and Traditional Affairs (CoGTA)
7.3.2 Recommendations for the Municipal Demarcation Board (MDB)
7.3.3 Recommendations for the traditional leadership
7.3.4 Recommendations for National Treasury
7.3.5 Recommendations for the African National Congress (ANC)
7.4 THE IMPLICATIONS OF THE RESEARCH FOR THEORY AND PRACTICE
7.5 SCOPE FOR FURTHER RESEARCH
7.5.1 Future research with regard to research methods
7.5.2 Future research with regard to the causes of demarcation disputes in the Vhembe District
7.5.3 Future research on service delivery challenges in the Vuwani and Malamulele areas
BIBLIOGRAPHY
