Urban Local Govts. & Economic Growth: Challenges & Opportunities - Essay Sample

Introduction

Urban areas are the engines of economic growth worldwide, South Africa included. Since they make the central part of economic growth, urban centers are critical to the success of the public sector and the country's economy. However, this success gets achieved only when municipal public services and infrastructure are provided equitably and funded efficiently (Farvacque-Vitkovic & Kopanyi, 2014). The urban local governments are considered the subject to a range of forces that usually create upward pressure on municipalities' expenditure (Farvacque-Vitkovic & Kopanyi, 2014). Although South Africa has an internationally reputable fiscal framework for local governance, there are some loopholes or inadequacies in the South African local government's urban financial management system. An efficient economic structure is always established on a clear set of practical (expenditure) responsibilities for the essential local infrastructure services delivery. These services include electricity distribution, local roads, waste solids, water services, and transport with additional, comprehensive managerial authority over spatial planning and development control. The National Treasury briefing on the state of South African local government and financial management on 30th June 2018 confirmed a decrease in clean audit, indicating that some gaps exist in the financial management system (Place & Street, 2020). The paper identifies and analyzes the possible loopholes that existed in the local government's financial management system. It gives a case study on successful fiscal management strategies and recommends how the South African local government can succeed in the financial management system.

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Background and Description of Financial Urban Management Systems in South Africa

The 1996 Constitution defines a quasi-federal system of intergovernmental association (recognizing municipalities) as a separate field of government in the setting of a network of cooperative governance (Place & Street, 2020). Therefore, the local governments are not agents of the federal government but independent government spheres (Chauke & Mathebula, 2019). Chapter seven of the Constitution and the Municipal Structures Act (1998) also recognizes category A municipalities and mandates them to have independent municipal executive and legislative power in their area (Chauke & Mathebula, 2019). The constitution considers the rest of the country to be governed at the local level with local municipalities and district municipalities, usually known as Category B municipalities and Category C municipalities in that order.

The 1996 Constitution, the Municipal Structures Act (1998), and the relevant executing legislation specify the specific functional competencies and expenditure obligations of the various government spheres (Chauke & Mathebula, 2019). The wide range of urban service delivery functions and infrastructure are constitutionally assigned as municipal competencies. The local governments are accountable for their management; these services include municipal public transport, sanitation services, water provision, and municipal planning. Therefore, the South African urban public finance system is primarily based on the benefit principle. The user pays for services provided by the municipality through quasi-user charges or user charges like taxes and property rates. Therefore, there should be accountability, transparency, equity, and inclusion in public funds provision and management. Local financial management duties, including an oversight role for the National Treasury, are part of the Municipal Financial Management Act as amended in 2003 (Chauke & Mathebula, 2019).

Gaps in the South Africa Fiscal System

Urban areas are solutions, assets, and drivers of social and economic development. They have a substantial untapped economic potential that can and should be leveraged to produce wealth and economic opportunities. However, this requires appropriate urban planning that supports urban connectivity, integration, and compactness (Farvacque-Vitkovic & Kopanyi, 2014). Although South Africa had an internationally well-regarded fiscal framework for local governance, it has some gaps in its urban financial management system, as pointed out in the National Treasury briefing on 30th June 2018 (Place & Street, 2020). According to Farvacque-Vitkovic & Kopanyi (2014), even the best urban plans may not be unemployed if financial and regulatory strategies for implementation do not accompany the right projects. Therefore, the South African local government's well-regarded fiscal framework is at risk with the continued decrease in clean audits. A strategic public investment goes hand in hand with supporting governance systems and vital funding mechanisms. However, the local governments in South Africa are facing the near-impossible task of funding the services and infrastructure required to meet the essential needs of rising urban populations; this may be due to possible financial reasons (Farvacque-Vitkovic & Kopanyi, 2014). Despite them lacking technological support and capacity, the opportunities for revenue management are usually restricted by incompetent managerial structures or disadvantageous political frameworks. National Treasury report noticed that auditors are often under pressure to change the audit outcomes; this is due to political interference and political in-fighting (Place & Street, 2020). This lagging local government spending may result in economic stagnation, choking urban conditions, and a vicious cycle of budgetary shortfalls if it takes a toll on domestic economic activities and urban efficiency.

However, strategic financial systems and governance can provide hope for struggling local governments. There are possibilities for matching local requirements with revenue-generation tools and institutional frameworks. Appropriate financial management at the local government level can tap into practical strategies that improve revenue collection efficiency, gain public support, and control land speculation. Effective fiscal discipline may also improve urban affordability for the poor, incentivize economic activity, and capitalize on regional and urban economies of scale (Farvacque-Vitkovic & Kopanyi, 2014). The political interference with the municipalities' management led to a decrease in a clean audit. Therefore, the resulting budgetary improvements without political interference can empower the local governments to make opportunistic investments in their urban areas, stimulating a virtuous cycle of prosperity, revenue generation, and economic growth.

The fundamental challenge of municipal finance in South Africa is asserted as the gap between municipal expenditure and financial resources; in many cases, local government expenditure struggles to utilize inadequate monetary fund effectively. However, as the urban population in South Africa increases, the demand for infrastructure and municipal services also increases, widening this fiscal gap. The fact that urban revenue growth does not match the increasing metropolitan economic activities may be due to technically lack of the local government income elasticity. The National Treasury report showed that there were signs that some municipalities were under tension when they were unable to collect revenue (Place & Street, 2020). The report showed that 51% of local governments had overspent their operating budget, while 36% had overspent their capital budgets (Place & Street, 2020). Compared to the 2012/13 budgetary report, the number of municipalities in financial distress increased from 95 to 125 in 2017/18; this was almost half of all the urban municipals in South Africa. The increase in the municipalities' financial distress was due to the lack of capacity building within the local governments and the approval of unfunded budgets by municipalities due to pressure from political interference (Place & Street, 2020).

National Treasury reported that there was a drop in clean audits; this was due to the increasing number of municipalities approving unfunded budgets. The report also noticed that the new demarcations in 2016/17 never helped improve the local government's overall funding positions (Place & Street, 2020). Nearly 124 or 48% of municipalities had less than three months of cash coverage; this included three metropolitan cities (Place & Street, 2020). Therefore, the report showed that South African local governments also do not employ budget principles, including participation, equity, accountability, and transparency in their fiscal management (Farvacque-Vitkovic & Kopanyi, 2014).

Lack of Budget Principles

The local government budget should be governed by various principles, including accountability, equity, participation, transparency, equality, and non-discrimination. However, this was not the case for the municipalities in South Africa.

Lack of Transparency. A nation's budget transparency score, shown on the Open Budget Index, recommended the public's access to budgetary information; how the federal government and municipalities raise and spend public resources. Transparency as a principal is vital in the budget process; it identifies weaknesses and allows for informed government policy analysis resulting in the implementation of required reforms (Farvacque-Vitkovic & Kopanyi, 2014). From the National Treasury's briefing on local government financial management, the decrease in clean audits was due to irregularities and lack of consequences for transgressions. Only 18 municipalities had positive financial statements in 2017/18 compared to 33 in 2016/17; about 63 municipal governments regressed in their audit outcomes while only 22 improved (Place & Street, 2020). Municipalities paid a total of R907 million to consultants to help create financial statements, showing that several local governments could not prepare the financial reports on their own (Place & Street, 2020). Only 19% of the local governments could provide financial statements without material misstatements (Place & Street, 2020); this shows that there was no transparency.

Transparency increases faith in the government and can result in commitment to social trade-offs and consensus-building. It allows civil society and legislature to hold the government accountable for public funds; however, they can only make it possible if they have financial information on budget policies, expenditures, practices, and outcomes. Transparency can also contribute to fiscal and macroeconomic stability (Farvacque-Vitkovic & Kopanyi, 2014). Therefore, the principle of transparency is fundamental to the budget process, mandating that information concerning budget decisions be true, accurate, and portrays the actual state of the economy. Again, financial information should be made accessible and available to the general public, free to public inspection, and written clearly to be promptly understood by the public.

Lack of Accountability. As a principal, accountability is crucial in the budget process. Usually, the financial system of South Africa is based on or derived from citizens' contributions through taxation and public borrowings, whose burden of repayment is also borne by taxpayers (Farvacque-Vitkovic & Kopanyi, 2014). Although there was a decrease in clean audit, the local government could not be held accountable for the irregularities. The National Treasury director admitted that there was a lack of consequences for the defects and transgressions (Place & Street, 2020). He said that the environment had become more challenging for auditors and other role players in the accountabilit...