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Municipal Financial Management

Unfortunately, the past few years have seen numerous municipalities fall under provincial government administration due to insolvency. It is, moreover, not just the smaller rural municipalities which have struggled to cope with the rigorous demands of accountable financial management – Polokwane, Tshwane, Johannesburg and more have experienced scrutiny, and the consequent negative findings and reportage.

But no one should think South African municipalities are alone. In July 2013, Detroit became the largest city in the United States1 to enter bankruptcy, saddled with debt totalling an estimated US$18 billion.2 It joined the 12 other municipalities which have filed for bankruptcy protection since 2008.3 In the United Kingdom, the largest city outside London, Birmingham,4 is reportedly teetering on the brink of insolvency,5 and a Swiss economist posted an article in May 2014 warning that about 50% of German municipalities are on the verge of bankruptcy.6

So, what is to be done about it? At least, the Local Government: Municipal Finance Management Act 20037 aims at securing sound and sustainable management of the financial affairs of municipalities, and other institutions in the local sphere of government.

The Act is an extraordinarily comprehensive and detailed statute. It deals with such diverse aspects as municipal revenues, budgets, debt, cooperative government, mayoral responsibilities, municipal official responsibilities, supply chain management, the various municipal entities, financial reporting, resolution of financial problems, misconduct, and general treasury matters.

The Act falls under the authority of the Minister of Finance, but, ultimately, the buck stops with National Treasury – in terms of section 5(1)(c) of the Act, it must enforce compliance with its various provisions. However, it is the Auditor-General whose job it is to provide independent assurance that governmental activities are carried out, and – more importantly, for present purposes – accounted for, consistent with Parliament’s intentions. In short, this means to audit and report on how the government is spending the taxpayer’s money.

There are, essentially, two bodies implicated:

  • a municipality, which is an organ of state within the local sphere of government, consisting of the political structures and administration of the municipality, as well as the community of the municipality;
  • a municipal entity, which is either a private company established by a municipality, or a service utility which is a body rendering one or more various services to the community.

In turn, various officials are subject to the provisions (relevantly, at least, for present purposes) of the Municipal Finance Management Act:

  • the accounting officer of a municipality;
  • the accounting officer of a municipal entity;
  • a senior manager (of either) who exercises financial management responsibilities;
  • a municipal councillor;
  • an official of a municipality or municipal entity;
  • a board member of a municipal entity.

A. The accounting officer: municipalities and municipal entities

  1. He is guilty of an offence if, in a deliberately or grossly negligent way, he fails to:
    • ensure that resources are used effectively, efficiently and economically;8
    • take all reasonable steps to prevent unauthorised or irregular expenditure; or
    • take all reasonable steps to prevent expenditure that was made in vain and would have been avoided had reasonable care been exercised.9 10
  2. He is also guilty of an offence if he fails to take all reasonable steps to prevent corruptive practices:
    • in the management of the municipality’s assets;11
    • in the receipt of money;12
    • in the implementation of the municipality’s supply chain management policy.13
  3. The accounting officer also commits a crime if he:
    • deliberately misleads or withholds information (from the Auditor-General) on any bank accounts of the municipality;14
    • fails to take all reasonable steps to ensure that the entity has and implements effective revenue collection systems15 deliberately misleads or withholds information on money received or spent by the municipality;16 or
    • deliberately provides false or misleading information in any document which must be:
      • submitted to the Auditor-General, the National Treasury or any other organ of state;17 or
      • made public.18
  4. If an accounting officer uses his position for personal gain, or to improperly benefit another person, he commits a criminal offence.19

  5. If he uses confidential information (in the same way) if it was obtained as a result of his position, then he also is guilty of an offence.20

  6. There are a number of other provisions in the Municipal Finance Management Act which address what are, generally, financial management principles and practices. These sections21 make contraventions a criminal offence.

B. Senior managers

The accounting officers of a municipality, and a municipal entity may each delegate any of his powers and duties to officials.

  1. It is an offence if the manager or official to whom a power or duty was delegated, deliberately or in a grossly negligent way contravenes or fails to comply with a condition of the delegation.22

C. Municipal councillors

  1. A councillor is guilty of an offence if he:
    • influences (or attempts to influence) the accounting officer, the chief financial officer, a senior manager or any other official of the municipality to contravene any provision, or to refrain from complying with a requirement of the Act;23
    • interferes in the financial management responsibilities, or functions assigned to the accounting officer – or delegated by him to the chief financial officer;24
    • interferes in the financial management responsibilities or functions of the accounting officer of a municipal entity;25 or
    • interferes in the management or operational activities of a municipal entity.26

D. General

  1. A councillor, any official, board member or any other person for that matter is guilty of an offence if, in a deliberate or grossly negligent way, he:
    • impedes an accounting officer from complying with a provision of this Act, including the implementation of supply chain management policies;27
    • fails to take reasonable care to ensure its accuracy, or gives incorrect, untrue, misleading or incomplete information which is material to an investment decision relating to borrowing by a municipality or municipal entity;28
    • withdraws money from a municipal bank account otherwise than authorized by section 11 of the Act;29
    • provides false or misleading information for the purposes of any document produced as a requirement of the Act;30
    • interferes with the supply chain management system of a municipality or municipal entity;31
    • tampers with any tender, quotation, contract or bid after it has been submitted;32
    • tampers with any audit report submitted by the Auditor General.33
  1. Detroit’s population is nearly 700 000. 

  2. http://www.governing.com/gov-data/municipal-cities-counties-bankruptcies-and-defaults.html

  3. www.pbs.org/newshour/updates/municipalities-declared-bankruptcy

  4. Birmingham population is over a million. 

  5. www.localgov.co.uk/Birmingham-Council-could-go-bankrupt-in-18-months

  6. www.armstrongeconomics.com/2014/05/12/german-municipalities-in-crisis

  7. As amended; the latest amendment was effected by Act 12 of 2007. 

  8. Section 173(1)(a)(i) read with section 62(1)(a) and section 173(2)(a)(i) read with section 95(a) 

  9. Referred to in the Act as ‘fruitless and wasteful expenditure’. 

  10. Section 173(1)(a)(iii) and section 173(2)(a)(i) read with section 95(d). 

  11. Section 173(1)(a)(iv)(aa) and section 173(2)(a)(i) read with section 96(2). 

  12. Section 173(1)(a)(iv)(aa). 

  13. Section 173(1)(a)(iv)(bb). 

  14. Section 173(1)(b). 

  15. Section 173(2)(a)(i) read with section 91(a). 

  16. Section 173(1)(b). 

  17. Section 173(1)(c)(aa) 

  18. Section 173(1)(c)(bb). 

  19. Section 173(1)(a) and (2)(a) read with section 61(2)(b) and section 94(2)(b). 

  20. Section 61(2)(b) read with section 173(1)(a). 

  21. Section 173(1)(i) read with sections 62(1), 63(2)(a) and (c); 64(2)(a) and (d); and section 65(2)(a)–(d), (f), and (i). 

  22. Section 173(3). 

  23. Section 173(4)(a). 

  24. Section 173(4)(b). 

  25. Section 173(4)(c). 

  26. Section 173(4)(d). 

  27. Section 173(5)(a) and (e) read with section 115. 

  28. Section 173(5)(b). 

  29. Section 173(5)(c) read with section 11. 

  30. Section 173(5)(f). 

  31. Section 173(5)(e) read with section 118(a). 

  32. Section 173(5)(e) read with section 118(b). 

  33. Section 173(5)(e) read with section 126(5).