Public Sector Budgeting

QUESTION 1 (25 Marks)

This was something of a death knell for those municipalities that were already
struggling, and in extreme cases, necessitated provincial intervention under section
139(5) of the Constitution, read together with chapter 13 of the Municipal Finance
Management Act (MFMA). Discuss the importance of the Municipal Finance
Management Act of 2003 on municipalities’ service delivery.

Since the dawn of the democratic era, some South African municipalities have
experienced financial distress. In recent years, these financial failures have received
more attention from provincial governments, from national government, and from the
press. Some recent events helped focus attention on financial management problems in
municipalities. As also depicted in the case study provided, several municipalities were
showing severe signs of financial mismanagement. It is important to note that financial
mismanagement at the local level of government can result in poor service delivery. A
service delivery process is a process enabling the delivery of a service. It requires a
coupling between a provider and consumer and sometimes necessitates means. The
service is returned as long as the coupling exists. Therefore, the essence of this
question is to discuss the importance of the Municipal Finance Management Act of 2003
on municipalities’ service delivery.

The primary responsibility to address municipal financial problems lies with the
municipality, but other parties also have a role to play. Financial problems have different
causes and will differ in severity. Consequently, different tools are appropriate,
depending on the cause, severity and aggrieved party. Therefore, in a bid to enforce
financial accountability in the public sector, the National Treasury has played a pivotal
role in the introduction of financial management reforms across government since 1994
and in local government since 1996. The cornerstone of the reform initiative has been
implemented through the Municipal Finance Management Act No. 56 of 2003 (MFMA),
which became effective in July 2004 and supported by the annual Division of Revenue
Act. These pieces of legislation have been aligned with other local government
legislation, such as the Structures Act, Systems Act, Property Rates Act and their
regulations, to form a coherent package. An important objective of this Act is to put in
place a more effective financial accountability system over public entities. All entities are
required to be listed- the major public entities enjoy full managerial autonomy, with
government only able to intervene in its capacity as a majority or sole shareholder. The
Municipal Finance Management Act 56 of 2003 intends:

 To secure sound and sustainable management of the financial affairs of

municipalities and other institutions in the local sphere of government;
 To establish treasury norms and standards for the local sphere of government;
and
 To provide for matters connected therewith.

National Treasury's primary objective is to secure sound and sustainable management

of the financial affairs of government, national, provincial and local, and to lead such
policies and reforms. This entails supporting the development of a coherent approach
that assists in the improvement of delivery of services to communities. The mechanisms
used for this support ranges from regulatory interventions, manuals, guidance, circulars,
workshops, seminars, training, internship programmes and hands on support to
municipalities.

To fulfil this responsibility in the local government sphere, the National Treasury has
developed a phased implementation strategy of financial and technical support for local
government based around the MFMA, including conditional grants, subsidies, technical
guidelines, policy advice and the placement of international advisors with various
municipalities. This strategy takes into account the diverse capacity of municipalities for
implementing the reforms and the requirement for institutional strengthening, building
municipal capacity and improving municipal consultation, reporting, transparency and
accountability. The implementation strategy requires close co-operation with other
departments in national and provincial spheres.
The MFMA intends to modernize budgeting, accounting, and financial management
procedures by putting local government finances on a more sustainable footing,
allowing municipalities to give more services to their residents. It also seeks to provide a
good financial governance structure by defining and distinguishing the tasks and
responsibilities of the council, mayor, and officials. Furthermore, the MFMA is mandated
by the Constitution, which mandates that all three branches of government be
transparent in their financial dealings. It is also a key component of the overall reform
package for local government presented in the White Paper on Local Government
published in 1998.

Conclusively, the Municipal Finance Management Act of 2003 remains an important

piece of legislation that enforces financial accountability on public servants so as to
ensure that there is service delivery in the local government.
Question 2

With reference to article, discuss the effectiveness of Section 139 of Constitution to

budget and stages of the municipal budget.

The essence of this question is to discuss the effectiveness of Section 139 of

Constitution to budget and stages of the municipal budget. As mentioned in the case
study provided, municipalities were operating under severe financial crisis and that
called for urgent and intensified action to be taken to avoid a total collapse. Therefore,
Section 139(1) of the constitution grants a provincial executive broad powers to
intervene when a municipality cannot or does not fulfil an executive obligation in terms
of the Constitution or legislation.

Until recently, provinces have been reticent in using their section 139 powers. Indeed,
the problems of provincial government gave them little opportunity to take on those of
the municipalities within their jurisdictions. But things have changed drastically since the
2004 elections. With the increasing emphasis on the importance of providing all citizens
with basic services, the inadequacies of municipalities have become very evident and
provinces have been unable to avoid their constitutional responsibility to support
municipalities.

Section 139(1) provides a list of possible actions that the province may take when a
municipality fails to fulfil its obligations, but the list is not closed. This is clear from the
introductory wording of the subsection, which allows the provincial executive to take
‘‘any appropriate steps to ensure fulfilment of the obligation including’’ those listed in
paras (a) to (c). Yet, as the constitutional court has said in connection with section 100
of the constitution, which corresponds, at national level, with section 139, the words
‘‘appropriate steps’’ must be construed to mean steps that are appropriate in the context
of the constitution and, particularly, chapter 3 (In re Certification of the Amended Text of
the Constitution of the Republic of South Africa 1996 1997 2 SA 97 (CC) par 124). Not
all steps will be ‘‘appropriate’’ within the framework of the constitution.

Section 139 of the Constitution prescribes five methods or instruments in which the PEC
may invoke an intervention in a municipality, namely:

 Issuing of a Directive: section 139{1}{a);

 Assuming responsibility: section 139{1}{b);
 Dissolving the Municipal Council: (section 139{1}{c);
 Taking appropriate steps to ensure that the budget or revenue-raising measures
are approved: section 139(4); and
 Imposing a recovery plan and possible dissolution of the Municipal Council:
section 139(5).

Moreover, when a municipality cannot or does not fulfil an executive obligation in terms
of the Constitution or legislation, the relevant provincial executive may intervene by
taking any appropriate steps to ensure fulfilment of that obligation. A directive is issued
to the Municipal Council, describing the extent of the failure to fulfil its obligations and
stating any steps required to meet its obligations. In assuming responsibility for the
relevant obligation in that municipality, it is important to maintain essential national
standards or meet established minimum standards for the rendering of a service;
prevent that Municipal Council from taking unreasonable action that is prejudicial to the
interests of another municipality or to the province as a whole; or maintain economic
unity.

The effectiveness of Section 139 lies in the interventions and providing solutions to
fixing the municipalities who find themselves dysfunctional in their operation and
governance systems. Some of the main challenges or failures of the interventions are,
amongst others, the following:

Provinces have inadequate or weak monitoring systems and are unable to monitor the
performance of municipalities and support those municipalities appropriately in
accordance with diagnostic outcomes of monitoring such municipalities. More so,
provinces tend to deploy one person as an Administrator without concomitant experts
per the diagnosis of the challenges encountered in the municipality, such as financial or
human resource experts where required; and this Administrator, more often than not,
relies on municipal personnel to execute his/her mandate. At times, these municipal
personnel are skeptical and very reluctant, and most times, uncooperative to assisting
the Administrator;

Relevant sector departments are not coming on board during the intervention phase, or
their plans are not aligned to those of the municipalities they are servicing. There is
resistance and obstructionist tendencies from Municipal Councils and municipal
personnel to an extent that there is no cooperation, and at times, bordering on illegal
activities such as destroying documentation and issuing of legal instructions to other
municipal officials against the Administrator's work.
QUESTION 3 (25 Marks)

The importance of a municipal budget cannot be underestimated. The budget process

plays an important role in the provision of municipal services to the public. The budget
process, fulfils the same task as an economic market since it establishes which
municipal services will be supplied to the public, who will receive these services, how
they will be delivered, and how the costs of the services are to be financed. There is no
municipality is too small not to need such an important forecast and guide. A properly
prepared budget will result in the elimination of unnecessary expenditures, increased
efficiency in the methods of collecting revenues and preservation of the credit of the
municipality. A municipal budget is the projected financial operating plan. In general, a
budget accounts for expected revenues and allocates resources to particular
expenditures. A budget serves two primary purposes namely to set out a complete
programme with regard to all expenditures of the municipality during the coming year,
and the purpose for which they are to be made, and to forecast the revenues
from which such expenditures are to be financed as well as to provide a method of
controlling expenditure so that a municipality may live within its means.

Municipal budgets are prepared by municipal officials each year, and there are
opportunities for residents and community stakeholders to engage in the process and
have their voices heard regarding the programmatic and financial needs of their
communities. The municipal budget might be the most important document prepared by
municipal officials because it determines how municipal funds will be spent each year.

In terms of legislative requirements two types of municipal budgets and these include
the main budget which must be prepared before the start of the new financial year, and
the adjustments budget that may be introduced during the financial year. The
requirements of the main budget:

In terms of Section 15 of the Municipal Finance Management Act (MFMA), each

municipality may only incur expenditure within the limits of the amounts appropriated for
the different votes in an approved budget. Only the following sources should be used to
fund this expenditure:

 Realistic estimation of revenues to be collected

 Cash-backed accumulated surpluses from the previous years that have not been
committed for other purposes
 Borrowed funds, which may only be used for the capital budget

Section 17 of the MFMA specifies the following requirements with regard to the content
of a municipal budget. It stipulates that the municipal budget must be of realistic
estimation of revenues for the budget year under the different votes of the municipality.
Expenditure appropriated for the budget year under the different votes of the
municipality and revenue per revenue source and projected expenditure by vote for the
two financial years following the budget year. In addition, the estimated revenue and
expenditure by vote for the current year. The budget must contain the actual revenue
and expenditure by vote for the financial year preceding the current year and a
statement containing any other information required by the constitution or as may be
prescribed.

An annual budget is usually divided into a capital budget and an operating budget.
Money can only be spent on a capital project if it is appropriated in the capital budget of
the municipality. Before a capital project is approved, the council of the municipality
must consider the projected cost that covers all the financial years until the project is
operational as well as future operational costs and revenue on the project.

The municipal budget also contains some adjustments. Changing circumstances may
necessitate a revision of the annual budget of a municipality. This revision is done by
means of an adjustments budget. The adjustment budget serves to adjust revenue and
expenditure estimates downwards in the event of significant under-collection of revenue
during the current year. It also serves to appropriate additional revenues that have
become available over and above those anticipated in the annual budget, but only to
revise spending programmes already budgeted for as well as to authorize certain
unforeseeable and unavoidable expenditure. More so, it also authorizes the use of
projected savings in one vote towards spending under another vote as well as to
authorize the spending of funds that where unspent in the previous financial year.

There are various reasons for revising the annual budget. A budget revision is a
process that allows budget specialists to make changes to a budget in order to increase
the company's financial standing. This can mean making revisions to pull in more
income to pay off liabilities or finding methods to satisfy the amount of expenses the
business is currently spending.

Budget Revisions may be necessary if the current planned expenditures differ from the
original or most recent budget approved by the sponsor. Reasons for revising a budget
include increases (or decreases) in funding amounts or to reallocate budgeted funds
between cost categories within a project. The following points have been considered
while reviewing a budget.

 Error may be find out which was not find out while preparing the budget
originally.
 Emergence of unforeseen and unanticipated situations.
 Changes in the internal factors i.e. changes in the grade of labour, capacity
utilization etc.
 Changes in the external factors i.e. policy of the government, material prices,
nature of economy etc.

Budget revisions may require sponsor approval. An example is the outbreak of Covid19.
Municipalities definitely had to adjust their budget in order to suit the demands that were
posed by the pandemic. There was an immediate need to procure drugs, increase the
capacity of health care facilities et cetera and this definitely called for budget revision.