An analysis of the financial viability of municipalities in Freestate Province: the case of Mangaung Metro Municipality

Abstract

Local authorities’ independence level largely depends on the adequacy of the revenue part of local self-government budgets. One of the sources of income of local authorities is the payment of the population and business entities for services. Along with this, there is the issue of insufficient accumulation of revenues to the provincial budget due to non-payment of remuneration for services rendered. Municipalities are responsible for providing, regulating and managing essential services such as water supply, domestic wastewater treatment, electricity distribution, sewage systems and health services. This article summarizes the arguments and counter-arguments of the scientific discussion regarding municipalities’ problem in filling the revenue part of the local budget. The study’s primary purpose is to analyse municipalities’ financial capacity in the province of the Free State (Republic of South Africa). The systematization of literary sources and approaches to solving the problem shows that most municipalities in the Republic of South Africa face financial issues. Municipalities have liquidity problems or cannot fulfil their obligations on time. Despite these problems, municipalities must provide services at an acceptable level. The relevance of this scientific problem-solving is that it focuses on analyzing the financial difficulties faced by the Mangaung Metro Municipality. The primary data source for this study was the questionnaire results. The sample consisted of 24 employees and financial statements of municipalities and auditors’ conclusions. The municipality’s financing structure consists on average of 65% from internal revenues, 29.5% from state transfers and 10% from external borrowings. The financial capacity of the municipality is impaired due to an increase in the number of debtors, problems with cash flows, rising costs, unstable revenues to the revenue part of the budget, and an increase in short- and long-term debt. According to the survey results, 63% of respondents reported that the water supply sector is the largest source of debt among consumers, and the debt collection system could be more effective. The results may be helpful in municipalities with similar governance architectures. Thus, the municipality is recommended to develop and implement a strategy for increasing revenues, a cash flow plan, review the tariff policy, and implement an effective system of debt collection and cost reduction measures.