Equitable share formula and fiscal capacity in municipalities with particular reference to Msunduzi Municipality.

Abstract

The apartheid regime left its imprint on South Africa's municipalities with systematic under-investment in municipal infrastructure in black areas. Deprivation of communities with limited access to basic services including water, sanitation, refuse collection and roads created skewed settlement patterns as one of ‘enduring planned and deliberate’ poverty. The Constitution of the Republic of South Africa, 1996 established ‘wall-to-wall’ local government with municipalities to address past inequalities. There was no equally corresponding increase in the tax base of communities within municipalities. As a result, they are faced with fiscal imbalances in raising adequate funds to meet mandated functions with municipalities heavily dependent on intergovernmental transfers from national government. Twenty one years into democracy, municipalities continue facing infrastructural disparities evidenced by significant increases in service delivery protests. A suitable redistributive approach is envisaged as current local government funding arrangements may not be addressing objectives of development and redistribution adequately. National Treasury recently completed a review of the 2008 LGES formula and introduced a new formula for the equitable distribution of funds to municipalities. The purpose of the study was to assess the appropriateness of the new LGES formula as a resource allocation and mechanism for equitable resource sharing in government, deemed a focal point in addressing municipal fiscal challenges, using Msunduzi Municipality as reference. Underpinned by the pragmatic paradigm or philosophical worldview, the study used mixed methods research design which included review of documented data, as well as questionnaires for empirical data. The key research question was if the current Local Government Equitable Share formula fiscally capacitates municipalities such that they are able to provide basic services to communities? The study revealed that there is insufficient data available at the local government level to support the design of an appropriate LGES formula. The formula is unable to accurately quantify fiscal structural gaps in municipalities, and therefore fails to respond to basic service needs of municipalities. Furthermore, the LGES formula cannot be effective if the restraints on municipal own revenue sources are unresolved. National government must identify constraints to revenue generation and collection in municipalities to provide appropriate and sustainable financial support whilst promoting economic development, good governance and social progress for all financially ‘ailing’ municipalities.