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A Financial Sustainability Model For The South African Local Government

Dr Shepherd Mhlanga

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A Financial Sustainability Model For The South African Local Government

Dr Shepherd Mhlanga

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A Financial Sustainability Model for the South African Local Government

Shepherd Mhlanga

A Thesis Submitted towards the Study for the Degree of the Doctor of Public
Administration at the Department of Public Administration
Faculty of Management and Commerce, University of Fort-Hare

Academic Year: 2019

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Acknowledgements
I am deeply indebted to many people for contributing their time, insightful and truthful
views during this research. Even though it would be impossible to name all of them
individually, I am taking this opportunity to thank everyone who supported me
throughout the course of this Doctoral journey. It would however be a gross injustice
not to single out a few people who were with me every step of the way.

Firstly, I would like to express a very deep and sincere gratitude to my research
supervisor, Professor Dovhani Reckson Thakhathi, for giving me the opportunity and
providing invaluable guidance throughout this research. His dynamism, vision,
sincerity and motivation deeply inspired me. It was indeed a great privilege and
honour to work and study under his guidance. Without his tutelage I would not have
survived the challenging colloquium. I would also like to thank the rest of the
academic and support staff of the University of Fort Hare for their invaluable
contributions.

As always, my family was with me in the pursuit of this project. They are the ultimate
partners. I am very thankful to my supportive wife, Serrah Nomcebo, and my two
wonderful girls, Nomsa Kudzai and Refilwe Chipo, for their love, understanding,
prayers and continued support in completing this research work.

Last but not least I would like to express my profound gratitude to Chris Thipe for his
unwavering support and encouragement throughout my years of study. He is the
epitome of inspiration and constantly checks on my personal progress. Always my
first stop when I need wise counselling. He was a brutally honest advisor and
confidante throughout the process of researching and writing of this thesis. I am
where I am because you never stopped believing in me. Thank you brother, your
advice and guidance always mean a lot and are truly appreciated.

Finally, the Grace of God was abundantly evident throughout this journey.

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Abstract
Local government financial sustainability leverages a local municipality’s capabilities
to conceptualize and implement an array of its developmental programmes. This
thesis evaluates the state of the initiatives for bolstering financial sustainability in the
increasingly complex contemporary South African local government sphere. The
motive of the study was to identify major paradoxes and a local government financial
sustainability model that could be extracted and suggested for mitigating such
constraints.

Using a meta-synthesis as a principal technique in content analysis, findings

revealed that major determinants of local government financial sustainability are
often linked to the application of the four-step’s processes in strategic cyclical
financial sustainability framework and three foundational constructs for financial
sustainability management.

The four-step’s processes in strategic cyclical financial sustainability framework were

found to aid environmental analysis, identification of the sources of revenues and
revenue generation, managing the utilization of the generated revenues and
monitoring and evaluation. As it emerged from the findings, these positive effects of
strategic cyclical financial sustainability framework are often illuminated by three
foundational constructs for financial sustainability that leverage financial risk
management, governance and leadership. However, in lieu of the application of
relevant mitigating strategies, it also emerged from the analysis of the findings that
initiatives that bolster financial sustainability may still be constrained by poor analysis
and identification of the level of financial sustainability maturity.

5.3 FINANCIAL SUSTAINABILITY MODELS AND METHODS USED BY THE DIRECTORS

AND MANAGERS IN THE SOUTH AFRICAN LOCAL GOVERNMENT…………………….143
5.4 INHIBITORS OF INITIATIVES FOR IMPROVING FINANCIAL SUSTAINABILITY IN THE
SOUTH AFRICAN LOCAL GOVERNMENT ................................................................................ 159
5.4.1Inadequate Municipal Capacity ......................................................................................... 159
5.4.2Limited Income Generating Activities ............................................................................... 162
5.4.3Deficient Local Government Procurement System ........................................................ 165
5.4.4Poor Leadership and Governance .................................................................................... 169
5.5 MUNICIPALITIES WHICH ARE SUCCESSFUL IN LEVERAGING REVENUE
COLLECTION AND FINANCIAL SUSTAINABILITY .................................................................. 172
5.5.1City of Johannesburg .......................................................................................................... 172
5.5.2City of Tshwane ................................................................................................................... 175
5.5.3 City of Cape Town .............................................................................................................. 178
5.5.4eThekwini Municipality ........................................................................................................ 180
5.6 CONCLUSION ....................................................................................................................... 182
Chapter 6 ....................................................................................................................................... 183
DISCUSSIONS AND LINKING TO LITERATURE REVIEW ................................................. 183
6.1 INTRODUCTION ................................................................................................................... 183
6.2 FOUR PILLARS OF FINANCIAL SUSTAINABILITY ....................................................... 185
6.2.1Strategic Financial Planning .............................................................................................. 185
6.2.2Income Diversification......................................................................................................... 187
6.2.3Sound Financial Administration and Management ........................................................ 189
6.2.4Own Income Generation .................................................................................................... 191
6.3 THREE FOUNDATIONAL CONSTRUCTS OF FINANCIAL SUSTAINABILITY ......... 193
6.3.1Financial Risk Management .............................................................................................. 193
6.3.2Financial Governance ......................................................................................................... 195
6.3.3Financial Leadership ........................................................................................................... 198
6.4 THREE FOUNDATIONAL NON-FINANCIAL CONSTRUCTS OF FINANCIAL
SUSTAINABILITY ........................................................................................................................ 200
6.4.1Political Stability ................................................................................................................... 201
6.4.2Fiscal and Economic Stability ............................................................................................ 204
6.5 Measuring the Maturity of Local Government financial sustainability ........................... 207

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6.5.1 Four Perspectives (Liquidity, Resilience, Service & Fiscal Responsibility, and Public
Confidence) Of Local Government Financial Sustainability .................................................. 207
6.5.2Five Spectrums (At Risk, Compliance-Based, Incremental, Strategic, & Systematic)
of Local Government’s Financial Sustainability ....................................................................... 209
6.6 CONCLUSION ....................................................................................................................... 214
Chapter 7 ....................................................................................................................................... 215
CONCLUSIONS AND RECOMMENDATIONS ....................................................................... 215
7.1 INTRODUCTION ................................................................................................................... 215
7.2 CONCLUSIONS..................................................................................................................... 215
7.3 RECOMMENDATIONS ........................................................................................................ 219
7.4 CONCLUSION ....................................................................................................................... 228
REFERENCES ............................................................................................................................. 231

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Chapter 1

INTRODUCTION AND RESEARCH BACKGROUND

1.1 INTRODUCTION
Financial sustainability is one of the critical trajectories for effective performance of
the contemporary public sector organisations (Bergmann &Grossi, 2014:90). In the
midst of the increasingly complex and numerous competing needs of the population,
financial sustainability edifies resource optimisation (Bergmann &Grossi, 2014:90).
This enables governments to effectively respond to such competing needs and
demands of the population. Effective response to the different demands of the
population influences the improvement of the citizens’ satisfaction and the reduction
of the risks of political instabilities often exploited by the opposition political parties to
cause situations that undermine the successful implementation of different
government developmental programmes (Izza, 2012:9). The pursuit of financial
sustainability also lures the government to consider investing enormous financial
resources in different revenue generating socio-economic activities. Successful
implementation of such different economic development programmes not only
catalyses economic growth and development, but also createsnew employment
opportunities and improvesof the standards and conditions of living of the population
(Organisation for Economic Co-Operation and Development-OECD, 2009:14).

To develop a financially sustainable government department or institution, the use of

a prudent model for financial sustainability is a prerequisite (Manuzi, 2015:6).
Unfortunately, empirical facts in the South African local government imply that as
much as all the relevant legislative and policy frameworks for emboldening financial
sustainability are in place, the suitability of a framework highlighting the critical
constructs that must be considered to operationalise such legislative and policy
stipulations seems yet a challenge (Maphalla, 2015:9; Cashdan, 2015:10; Mabugu
and Monkam, 2013:5; Swilling, 2005:144). Although a number of studies have
evaluated the critical determinants or the inhibitors of financial sustainability in the
contemporary public sector organisations, the issue of the debates on the suitable
financial sustainability model that can be adopted seems to have been ignored by
most of the authors (Maphalla, 2015:9; Cashdan, 2015:10; Mabugu & Monkam,
2013:5; Swilling, 2005:144).

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This research, therefore, aims to fill such a theoretical gap by undertaking relevant
theoretical analysis from which the findings will be triangulated with the qualitative
views drawn from the managers on the effectiveness of the initiatives for enhancing
financial sustainability in the South African local government. This will facilitate the
extracting of a new theory on financial sustainability that can be proposed to the
directors and managers in the South African local government. In a bid to
accomplish this, this research provides the overview of the background of the local
government’s financial sustainability problem, the theoretical framework, the
research problem statement, and the research objectives and questions that guided
the entire research process. This also outlines critical literature and theories, and the
research design and methodology that used in the primary research process.

1.2 RESEARCH BACKGROUND

The notion that financial sustainability in the South African local government is a
challenge is accentuated in most recent empirical evidence that suggests municipal
finance management challenges affecting financial sustainability of most
municipalities are not related to lack of the appropriate regulatory frameworks and
lack of skills (Maphalla, 2015:9; Cashdan, 2015:10; Mabugu & Monkam, 2013:5;
Swilling, 2005:144). Instead, financial sustainbaility issues in the South African local
government is often caused by a combination of factors linked to poor financial
waste management, poor monitoring and evaluation, low revenue generaton for the
rural municipalities, corruption, poor governance, poor financial risk management
and poor ethical financial leadership (Maphalla, 2015:9; Cashdan, 2015:10; Mabugu
& Monkam, 2013:5; Swilling, 2005:144). Trends from different municipalities and
metropolitan municipalities indicate that there is a challenge of controlling and
minimizing financial waste by most municipal officials. This is noted to arise from the
situation where procurement is done without necessarily conducting relevant
analysis to understand the market and the prices of the products or services being
solicited (Swilling, 2005:144). The implications are latent in the fact that some
municipalities end up procuring products or services that are overpriced.

On the other hand, if thorough analysis had been conducted, products or services
with better prices could have been obtained to enable the municipalities save an
enormous amount of financial resources. In most cases, the products or services
procured cost millions or even billions of rands, with the consequence that had better

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prices been obtained, the municipalities would have saved a significant amount
which can be invested in the design and the implementation of the other government
programmes (Swilling, 2005:144). Such a situation is often caused by attitudes and
the mistaken perceptions of most municipal procurement officials that since
legislation requires them to plan and budget, they are simply expected to do that and
that is all that they are always doing (Schoeman, 2011:3).

For municipalities to become financially sustainable, they need not only utilise the
available financial resources more effectively, but also invest in the activities that
influence the increment of revenue generations (Swilling, 2005:144). Unfortuantely,
empirical facts indicate that whereas most of the urban and metropolitan
municipalities are able to generate own sources of revenues, most rural
municipalities tend to rely mainly on grants from the central government and
donations (Maphalla, 2015:5). This affects the extent to which they are able to
generate and accummulate sufficient financial resources to edify the overall
improvement of their financial sustainability (Mabugu & Monkam, 2013:8). Even if the
initiation of certain critical economic projects such as the encouragement of
agriculture among the rural population would have been possible, empirical facts
indicate that there is often unwillingness by certain municipalities to recruit skilled
and creative employees that can initiate projects that can boost rural economies
(Schoeman, 2011:3). The implications are latent in the fact that most rural
municipalities tend to struggle with the need to generate sufficient financial resources
to improve their financial sustainability.

As the municipalities struggle with limited financial resources, the challenge of

corruption usually also arise to undermind the optimisation of the limited resources.
This is often reflected in the inflating of bills and payments to third party suppliers
(Maphalla, 2015:5). It is such a limitation that motivated this research to conduct
relevant theoretical analysis and triangulate with the interview findings to be obtained
from the municipal managers to reach logical conclusion on the financial
sustainability model that can be proposed to the managers in the South African Local
Government. Although a number of studies have evaluated critical determinants or
the inhibitors of financial sustainability in the contemporary public sector
organisations, the issue of the debates on the suitable financial sustainability model
that can be adopted seems to have been ignored by most of the authors (Slabbert,

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2014:18). In a study that evaluated the Drakenstein Municipality’s long-term financial
sustainability policy, Drakenstein Municipality (2014) highlights that some of the
major determinants of the contemporary municipal financial sustainability are linked
to long-term planning that focuses on instigating new sources of revenues for the
municipalities. However, just like in Ramphele’s (2008:2) study that examined the
influencers of municipal financial viability, the research by Drakenstein Municipality
(2014) did not end up with the postulation of any new theory on financial
sustainability that can be adopted by the South African local government.

Ramphele (2008:2) argues that to improve the financial viability of the municipality,
certain critical micro (sound financial management) and macro (investment in
revenue generating projects) variables are of significant importance. Although the
National Treasury’s (2011:5) framework for financial sustainability seems to provide
a comprehensive approach for developing the municipal financial sustainability, it still
ignores certain critical factors such as financial risk management, good financial
governance and ethical financiall leaders that authors such as Maphalla (2015:9),
Cashdan (2015:10), Mabugu and Monkam (2013:5) and Swilling (2005:144)highlight
as some of the critical underminers of the initiatives for improving financial
sustainability in the contemporary South African local government.

Hitherto,as the issue of the suitable financial sustainability theory gets eluded in most
theories, empirical facts imply that financial sustainability is an issue that most
municiaplities in South Africa still struggle with in the management of their today’s
activities (Maphalla, 2015:9; Cashdan, 2015:10; Mabugu & Monkam, 2013:5;
Swilling, 2005:144). Although the major critical causes of financial sustainability is
often a challenge, the question as to the framework of how such models can be
replicated to suit the local and unique situations in the South African local
government seems to have been ignored by most recent studies on financial
sustainability in the South African public sector (Mabugu & Monkam, 2013:8). It is
such a conceptual shortfall that this research seeks to address.

1.3 RESEARCH STATEMENT

Financial sustainability is a major paradox that most managers and directors in the
contemporary South African local municipalities are still grappling with.

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1.4PURPOSE OF THE RESEARCH
The purpose of this research was to evaluate the resilience of financial sustainability
in the South African local government, so as to identify major paradoxes and a local
government financial sustainability model that can be proposed to the directors and
managers in the South African local government.

1.5 RESEARCH OBJECTIVES

The objectives of the study are to:

 Analyze the trends influencing the evolution of the concept of financial

sustainability in the South African local government since the dawn of Post
1994 Democratic Dispensation.
 Evaluate the financial sustainability models and methods used by the
directors and managers in the South African local government.
 Assess how effectively such models and methods influenced the improvement
of financial sustainability and the performance of the South African local
government.
 Examine the major inhibitors of the initiatives for improving financial
sustainability in the South African local government.
 Identify a new theory on financial sustainability that can be extracted and
proposed for improving the financial sustainability of the South African local
government.

1.6 RESEARCH QUESTIONS

The entire research process was guided by the following five fundamental research
questions:

 What are the trends influencing the evolution of the concept of financial
sustainability in the South African local government since the dawn of Post
1994 Democratic Dispensation?
 What types of financial sustainability models are used by the directors and
managers in the South African local government?
 How effective are such models and how have they influenced the
improvement of financial sustainability and the performance of the South
African local government?

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 What are the major inhibitors of the initiatives for improving financial
sustainability in the South African local government?
 Which new theory on financial sustainability can be extracted and proposed
for improving the financial sustainability of the South African local
government?

1.7 SIGNIFICANCE OF THE RESEARCH

It is evident from different empirical studies that financial sustainability is an issue
that the directors and managers in the South African local government still grapple
with. This research is therefore of importance with regards to evaluating the
effectiveness of the financial sustainability that the modern South African local
government uses. Such analysis will enable the identification of the major inhibitors
and the suggestion of a new financial sustainability model that can be adopted. The
adoption of such a new financial sustainability theory will certainly turnaround not
only the issue of financial sustainability, but also the performance of the
contemporary South African local government. This is accentuated in the fact that
the adoption of the appropriate financial sustainability model will lead to the
introduction and application of new methods that edify the improvement of the level
of resource optimisation.

The improvement of the level of resource optimisation will certainly impact on the
extent to which the South African local municipalities and municipalities are able to
use the usually meagre financial resources to meet as extensive needs of the
population as possible. All these will certainly impact positively on the improvement
of citizens’ satisfcation and the minimisation of the service delivery riots that usually
interfere with the effective performance of the South African economy. As the study
concludes with a new theory on financial sustainability that can be proposed to the
directors and managers in the South African local government, the overall
ontological implications of this research will be reflected in the addition of a new
theory onto the existing wealth of knowledge and theories on financial sustainability.
In a bid to accomplish this, the research process commenced with the review of the
relevant financial sustainability theories and literature, of which the overview is
provided in the next section.

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1.8 OVERVIEW: THEORIES AND LITERATURE
This section provides the overview of the three theories according to the four critical
sections encompassing: conceptual framework, theoretical framework, legislative
framework and empirical research reflecting trends on financial sustainability in
Canada and the United Kingdom.

1.8.1. Conceptual Framework: Local Government Financial Sustainability

The notion of financial sustainability has been evaluated by several authors
(Bergmann &Grossi, 2014:90; Izza, 2012:9; Organisation for Economic Co-Operation
and Development-OECD, 2009:14; Manuzi, 2015:6). However, in these different
theories, different aspects of the measures for enhancing financial sustainability
seem to have been evaluated and suggested by different authors. Leon (2001)
suggests four pillars of financial sustainability to encompass strategic financial
planning, income diversification, sound financial administration and management
and own income generation. As most authors on financial sustainability in the public
sector reiterate the three foundational constructs of financial sustainability that edify
the improvement of financial sustainability of the modern governments to be
associated with financial risk management, financial governance and financial ethical
leaders can undermine the initiatives for enhancing a public sector organisation’s
financial sustainability (Bergmann &Grossi, 2014:90; Izza, 2012:9; Organisation for
Economic Co-Operation and Development-OECD, 2009:14; Manuzi, 2015:6). To
assess the overall level of the maturity of financial sustainability of a public sector
organisation, Birney et al. (2010:7) suggest that evaluations can be undertaken using
five spectra that include: at risk, compliance-based, incremental, strategic and
systematic.

Despite the contribution of such theories to the development of the literature on

financial sustainability, such a discrete approach to the evaluation of the notion of
financial sustainability affects the integrated holistic approach that most of the
governments are able to adopt and apply to edify effectiveness of financial
sustainability. Such conceptual shortfall is further exacerbated by the fact that
although theories by authors such as Birney et al. (2010:7) and Leon (2001) offer a
comprehensive perspective of the constructs critical for developing a financially
sustainable public sector, its applicability in the context of the South African public
sector organisations seems to have not been explored by most authors.

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To address this gap, this research sought to use the holistic theory conceptualised in
Figure 1 to assess and develop an integrated model that can be tested, validated
and suggested to the managers in the South African local municipality. It is argued in
the conceptual model in Figure 1 that the integrated approach for improving financial
sustainability in the South African local municipality is often predicted by four main
constructs. The first construct would require the development and application of four
main pillars of financial sustainability encompassing strategic financial planning,
income diversification, sound financial administration and management and own
income generation.

The edifying effects of these four pillars are further catalysed by a continuum of
financial and non-financial sustainability constructs. It is at this point that this
research sought to fill one of the gaps arising from the fact that although financial
sustainability exceeds the notion of financial sustainability to emphasize the
initiatives for improving sustainability, most authors emphasize that only financial
factors are pre-requisites for achieving sustainability. In this endeavour, the three
foundational constructs that would influence financial sustainability are reiterated in
Figure 1 to encompass financial risk management, financial governance and
financial ethical leadership.

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Figure 1: A Conceptual Model on Financial Sustainability of the South African Local
Government

Source (Authors’ Interpretation and Conceptualisation of theories on Financial

Sustainability in the South African Local Government)

The effectiveness of these constructs is catalysed by a continuum linking such three

constructs to the mainly three foundational non-financial constructs encompassing
political stability, fiscal and economic stability, forecasting and sensing to mitigate the

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devastating negative effects of natural calamities and disaster. As the application of
such integrated constructs influence improvement of financial sustainability, it is still
often critical that an appropriate framework is developed to evaluate the overall
maturity of the financial sustainability of the local municipality according to four
perspectives that include liquidity, resilience, service and fiscal responsibility, and
public confidence. This must also be accompanied by the application of five
spectrums aligned to Birney et al.’s(2010:7) five spectrums of a government’s
financial sustainability that include: at risk, compliance-based, incremental, strategic,
and systematic. In other words, the extent to which the development and application
of a model akin to the model in Figure 1 is a foregone conclusion for improving the
financial sustainability of the contemporary South African local municipality is
accentuated in the problem statement in the next section.

1.8.2 Theoretical Framework: Public Sector Financial Sustainability

To accomplish this framework, the entire process of theoretical analysis was driven
by three fundamental financial sustainability theories encompassing Leon’s (2001)
“four pillars of financial sustainability”, the three foundational constructs of financial
sustainability that include risk management, governance and ethical leadership and
Birney et al.’s(2010:7) “five spectrums of a government’s financial
sustainability”(Bergmann &Grossi, 2014:90; Izza, 2012:9; Organisation for Economic
Co-Operation and Development-OECD,2009:14; Manuzi, 2015:6).

1.8.3 Leon’s (2001) Four (4) Pillars of Financial Sustainability

Financial sustainability is a strategic public finance management process through
which the government consistently invests in the activities that generate revenue for
the state and undertakes corresponding sound financial decisions to enable the
expending of the obtained revenues in the way that facilitates the effective meeting
of the present and future governmental fiscal needs (Provost, 2013:9). It is argued in
Leon’s (2001) “Four Pillars of Financial Sustainability” that the four main pillars that
influence the development of the financial sustainability of the contemporary public
sector organisations include: pillar 1-strategic financial planning, pillar 2-income
diversification, pillar 3-sound financial administration and management, and pillar 4-
own income generation. To develop a theory that can be replicated by the South
African local government in the initiatives for improving their financial sustainability, it
is noted in Figure 2 that the entire research process will be guided by the

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articulations on Leon’s (2001) “Four Pillars of Financial Sustainability”. In terms of
pillar 1-strategic financial planning, Leon (2001) argues that strategic financial
planning is critical for clarifying and prioritising the critical activities that must be
accomplished to not only optimise the limited resources, but also generate additional
revenues to increase on the amount of the financial resources that a government
department has at its disposal.

Figure 2: Theoretical framework: Leon’s (2001) “four pillars of financial

sustainability”

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Considering the extensive structures and designs of public sector organisations, the
existence of the appropriate strategic financial plan edifies the control of resource
utilisation and minimization of wastes. In most instances, Leon (2001) reveals that it
is often the implementation of the relevant strategies that has been the causes of
poor financial sustainability. Strategies are often devised and implemented without
considerations to the amount of the financial resources that the government
department has at its disposal. This affects the financial sustainability of such a
government department. However, linking the strategic planning process to the
financial plan enables a careful analysis and prioritisation of critical areas that must
be the centres for attention. In the end, a strong linkage of the strategic plan to the
financial planning process contributes to the minimization of wasteful financial
expenditures and the direction of the limited financial resources towards the areas
that stimulate economic activities in a particular geographical location. This
contributes to the strengthening of pillar 2 that deals with income diversification.

Income diversification refers to the process through which a government department

identifies and directs investments to the essential catalysts for economic growth that
provide numerous sources of revenues to the state. In most developing countries,
the initiatives for income diversifications have often entailed increment in the
activities that contribute towards harnessing the relevant natural resources,
agriculture, trade and the human resource development of the country. However, the
extent to which such initiatives are accompanied by the measures that uphold the
development of pillar that deals with the establishment of a sound financial
administration and management edifies the improvement of a government
department’s financial sustainability.

Sound financial administration and management is often initiated by adopting the

best practices, procedures and policies to control and reduce wastes and financial
risks. It entails not only the adoption of the best budgeting practices, but also
accounting measures that financial critical analysis prior to resource allocation and
reporting to enhance accurate allocation of financial resources. It also requires the
integration of financial risk management measures, good governance and
elimination of bad financial habits among the public officials and managers. As pillar
3 deals with the adoption of the relevant financial policies and procedures to
enhance the effective management of the existing financial resources, the

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embracement of pillar 4 would require the government department to initiate the
strategies for generating its own resources rather than relying on the financial
resources provided by the donors or central government.

Leon (2001) highlights some of the strategies often used to generate own financial
resources to include contribution to trust or endowment funds, fundraising for
institutional building or operations, investments in institutions that directly sell goods
and services to the public to raise funds, investing in the assets that can be rented
out, and creating strategic alliances and partnerships with the private sector
organisations to venture into actual businesses. Although Leon’s (2001) “Four Pillars
of Financial Sustainability” provides a comprehensive perspective of the constructs
critical for developing a financially sustainable public sector, its applicability in the
context of the South African public sector organisations seems to have not been
explored by most authors. Leon’s (2001) “Four Pillars of Financial Sustainability” will
be evaluated and triangulated with the other models on financial sustainability in the
public sector as well as the empirical findings to be drawn from the managers in the
South African Department of Cooperative Governance and Traditional Affairs. Such
analysis will facilitate the evaluation of the extent to which Leon’s (2001) “Four Pillars
of Financial Sustainability” can be modified to render it more applicable in the
contemporary South African local government.

1.8.4 Three Foundational Constructs (Risk Management, Governance &

Ethical Leadership) of Financial Sustainability
The initiatives for improving financial governance are often predicted by the
integration of the three pillars of financial governance that include financial planning,
financial monitoring and reporting, and board and organisational financial awareness
and involvement (Parry, 2010:3). Improvement of a government department’s
financial sustainability is not only edified by the effectiveness of financial risk
management and governance, but also by ethical leadership principles. These
ethical leadership principles include: providing good ethical financial leadership
examples, communicating ethical expectations, promoting effective financial
management, providing ethical trainings to the employees, development of the
appropriate code of ethics, measuring compliance and putting in place the essential
enforcement mechanisms (Burritt, Thoradeniya & Saka, 2005:19; Watt & Botsch,
2010:19). As on the other hand, Birney, Clarkson, Madden, Porritt & Tuxworth

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(2010:7) argue that the improvement of a government’s financial sustainability is
often edified by a coherent integration of certain five spectra of financial sustainability
that include: at risk, compliance-based, incremental, strategic, and systematic.

In institutions that are at risk, financial sustainability is not widely embraced by the
leaders. As the leaders adopt a reckless system, not only does frequent reckless
spending occur to undermine the initiatives for fostering financial sustainability, but
common flouting of the relevant financial regulations and legislations due to non-
compliance (Birney et al., 2010:7; The Association of Chartered Certified
Accountants, 2010:16). In contrast to the compliance level, at the incremental level,
managers tend to take the issue of financial sustainability more seriously. At the
strategic level, financial sustainability is considered by top managers and executives
as critical for enhancing the achievement of the different strategic goals and
objectives of the government (Birney et al., 2010:7; CIPFA, Chartered Institute of
Public Finance and Accountancy, 2010:4).

The systematic level reflects the situation under which financial sustainability is
embraced and integrated as part of the values and cultures that define how certain
critical financial activities and decisions must be undertaken to enhance financial
sustainability (Birney et al.,2010:7; CIPFA, the Chartered Institute of Public Finance
and Accountancy, 2010:4). However, contrary to Birney et al.’s (2010:7) “Five
Spectrums of Financial Sustainability”, theoretical analysis indicates that the
effectiveness of the initiatives for enhancing a government department’s financial
sustainability is often edified by a combination of factors. In other words, the overall
effectiveness of the process for improvement of financial sustainability in the public
sector is predicted by how internal mechanisms put in place facilitate the effective
interpretation and application of the relevant legislations on financial sustainability in
the public sector.

1.8.5 Legislative Framework: Financial Sustainability

The essence of financial sustainability as a critical pillar for effective performance of
the contemporary South African local government is accentuated in the legislative
and policy frameworks in Sections 213, 215 and 219 of the Constitution of the
Republic of South Africa of 1996, the 1998 White Paper on Local Government and
Decentralisation, the Municipal Structures Act of 1998, the Public Finance

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Management (Act No. 1 of 1999), and the Public Finance Act (No. 1 of 1999) as
amended by Act No. 29 of 1999. The other legislations are the Municipal Systems
Act 2000, the Municipal Finance Management Act of 2003, the Municipal Property
Rates Act of 2004, and among others, the Municipal Fiscal Powers and Functions
Act of 2007 (Cashdan, 2015:14).

To edify the financial sustainability of the South African local government, Sections
213, 215 and 219 of the Constitution of the Republic of South Africa (Act No. 108) of
1996 agitate for the creation of the national and provincial spheres of government to
enhance checks and balance between the different spheres of government and
government institutions (Cashdan, 2015:14). It also emphasises the need for
effective public finance management by establishing the national treasury that
prescribes the relevant financial standards and norms and monitors compliance with
such norms and standards. As part of the measures for enhancing the local
government’s financial sustainability, Sections 213, 215 and 219 of the Constitution
of the Republic of South Africa of 1996 also uses the national treasury to emphasise
the importance of transparency and accountability in the process of budgeting,
spending, borrowing and managing different government procurement activities
(Cashdan, 2015:14).

The provisions of sections 213, 215 and 219 of the Constitution of the Republic of
South Africa (Act No. 108) of 1996 are echoed in the Public Finance Management
(Act No. 1 of 1999), and the Public Finance Act (No. 1 of 1999) as amended by Act
No. 29 of 1999. The Public Finance Management Act recognises good and sound
financial management as critical for enhancing the sustainability of the government
departments to turn influence the optimisation of the limited financial resources and
the process of service delivery. To enhance accountability and financial sustainability
in the public sector, the Public Finance Management Act apportions responsibilities
and authorities between the national, provincial and local government accounting
officers (Mabugu & Monkam, 2013:8; Swilling, 2005:144). Most stipulations in the
Public Finance Management Act are substantiated in the Municipal Finance
Management Act (Swilling, 2005:144).

The Municipal Finance Management Act emphasises the need for effective
management of the inter-related components of the municipal public finance system

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that include planning and budgeting, revenue, cash-generation and expenditure
management, procurement, asset management, and reporting and oversight
(Schoeman, 2011:3). In a bid to improve the effectiveness of the Municipal Finance
Management Act, new reforms were introduced in the Municipal Budgeting and
Regulatory Reforms (2009) to clarify the roles and responsibilities of mayors,
executive councillors and non-executive councillors in the planning, budgeting and
the implementation of different government programmes (Swilling, 2005:144). It also
emphasises the importance for accountability by requiring the relevant local
government officials and accounting officers to provide the necessary reports on
different municipal expenditures and implementation of different government
programmes (Cashdan, 2015:14). The Municipal Finance Management Act, and the
Municipal Budgeting and Regulatory Reforms (2009) further stress the importance of
encouraging good accounting practice, governance and benchmarking between the
municipalities to adopt the best practices that minimise wastage and edify the
improvement of the municipal financial sustainability (Mabugu & Monkam, 2013:8).

1.8.6 Empirical Research: Financial Sustainability in Canada and the UK

If all the measures for improving a government’s financial sustainability are
considered, empirical studies conducted on financial sustainability in Canada and the
United Kingdom suggest that their positive effects on the improvement of financial
sustainability and the overall governmental performance may be enormous. The
improvement of the financial sustainability of a government department is
significantly linked to the improvement of the level of resource optimisation, the
successful implementation of different government programmes, the improvement
service delivery, citizens’ satisfaction and minimisation of political dissatisfactions
and instabilities (Turley & Semple, 2013:9; Panayotou, 2009:6). It is on that basis
that the improvement of a government department’s financial sustainability edifies
the improvement of the citizens’ satisfaction and the minimisation of the
dissatisfactions that usually cause political instabilities and undermine the effective
implementation of the other developmental initiatives (Bergmann &Grossi, 2014:90;
Izza, 2012:9; Manuzi, 2015:6).

In other words, it is not questionable that the improvement of the financial

sustainability of a government department is significantly linked to the improvement
of the level of resource optimisation, successful implementation of different

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government programmes, improvement service delivery, citizens’ satisfaction and
minimisation of political dissatisfactions and instabilities (Bergmann &Grossi,
2014:90; Izza, 2012:9; Manuzi, 2015:6). It is highlighted in theories that some of the
critical steps for building a financially sustainable government department often entail
organising for change, cleaning up the finances and starting with a major audit,
undertaking the organisational diagnosis, developing the governance structures,
conducting a regional niche assessment, developing a strategic vision and
organisational plan, setting up good incentives to motivate and entrench good
financial sustainability behaviours and practices, and undertaking the measures to
ensure the long-term entrenchment of the notion of financial sustainability
(Organisation for Economic Co-Operation & Development-OECD, 2010:4; National
Treasury, 2010:5; Commonwealth of Australia, 2008:7; Ellssworth, 1998:5).

However, empirical studies reveal that the initiatives for the development of a
government department’s financial sustainability is often still constrained by a
combination of the factors encompassing: lack of consistent long-term commitment,
poor monitoring and evaluation, and lack of entrenched culture of financial risk
management, financial governance and ethical financial leadership (Organisation for
Economic Co-Operation and Development-OECD, 2010:4; National Treasury,
2010:5; Commonwealth of Australia, 2008:7). Effective application of such measures
is usually not only constrained by lack of consistent long-term commitment, but also
lack of entrenched culture of financial risk management, financial governance and
ethical financial leadership (Turley &Semple, 2013:9; Panayotou, 2009:6). This
research, therefore, aims to fill such a gap by undertaking the relevant qualitative
evaluations to determine the financial sustainability model that can be extracted and
suggested to the managers in the South African Local Government.

1.9. METHODOLOGY
In a bid to determine a new theory on financial sustainability that can be extracted
and suggested to the directors and managers in the South African local government,
the study used the inductive research approach and the exploratory qualitative
research design.

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1.9.1 Inductive Research Approach
In the inductive research approach, the research process commences with the
identification of the problem, setting objectives and research questions and
conducting theoretical analysis and primary research to reach the logical conclusion
on the theory or the solution that must be suggested. This differs from the deductive
research approach in which the study commences with theory postulation or the
suggestion of a new theory against which the relevant theoretical analysis are
undertaken to modify the factor structures that are subsequently confirmed by the
findings resulting from the analyzed collected primary data (Leech & Onwuegbuzie,
2007:265; Maruna, 2010:123).

The application of a deductive research approach is usually motivated by the

circumstance where although the details of the problems are well known, the actual
solutions that can be adopted are often the challenge. Such an approach contrasts
with the exercise in the inductive research approach which is largely exploratory and
suitable for situations where the magnitude of the problem is not known and the
solutions to be adopted remain largely elusive. The sole application of the inductive
research approach in this research was therefore motivated by the fact that whereas
it is quite clear that financial sustainability in the South African local government is a
challenge, the magnitude and dimensions of the problem remains largely unclear
and uncertain.

The same also applies to the suitability of the financial sustainability theory that can
be suggested. On that basis, the use of the inductive research approach was
considered suitable in this research since it facilitated the use of the exploratory
approach to elicit relevant information that respond to the critical questions for this
study. Through this analysis, the nature and magnitude of the financial sustainability
challenges in the South African local government are understood to determine how
the theoretical framework in Figure 1 can be modified to develop a new theory on
financial sustainability that can be proposed for improving the financial sustainability
of the South African local government.

In a bid to accomplish this, the research process involved the application of an

exploratory qualitative research design and content analysis as the principal data
collection technique for the qualitative research method (Greene, 2007:14). To

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achieve this, the study used content analysis to probe five fundamental research
questions that entailed the evaluation of: What are the trends influencing the
evolution of the concept of financial sustainability in the South African local
government since the dawn of Post 1994 Democratic Dispensation? What types of
financial sustainability models are used by the directors and managers in the South
African local government? How effective are such models and how have they
influenced the improvement of financial sustainability and the performance of the
South African local government? What are the major inhibitors of the initiatives for
improving financial sustainability in the South African local government? Which new
theory on financial sustainability can be extracted and proposed for improving the
financial sustainability of the South African local government?

1.9.2 Content Analysis

Content analysis is an empirical methodologically controlled process of analyzing
texts not only to determine the presence or absence of the isolated categories of
themes and subthemes, but also to decipher the latent meanings that they offer on
the phenomenon being investigated. Derived from Ulich, Huasser and Mayring’s
(1985) longitudinal study on the psycho-social consequences of unemployment,
content analysis aids systematic text analysis to facilitate effective understanding of
the nature of the phenomenon being researched as well as the identification of gaps
or challenges and the remedial measures that can be suggested. In such analysis,
content analysis aids the identification of remedial models that can be extracted and
suggested for mitigating such challenges.

In effect, content analysis is not only a diagnostic process, but also a process of
thorough analysis undertaken to determine solutions that can be suggested for
mitigating the identified organizational challenges. In this study, content analysis was
used to aid thorough analysis of theories so as to gain insights into the possible
explanations on the influencers as well as inhibitors of local government’s financial
sustainability (Berelson, 1952). These theoretical views were extracted and
contrasted with the results of documents’ analysis on financial sustainability in the
local municipality in order to identify not only inhibitors, but also a new theory on
financial sustainability that could be extracted and proposed for improving the
financial sustainability of the South African local government. However, to
accomplish these, the study applied a combination of conventional and directed

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approaches to content analysis in conjunction with summative approach to content
analysis. Whilst using a combination of these content analysis techniques, the entire
process of content analysis was accomplished using four main steps encompassing:

 The analysis of the contemporary core theories on financial sustainability in

the public sector organisations;
 Document analysis on the trends and approaches for enhancing financial
sustainability in the South African local municipality;
 Triangulation of the core theories on financial sustainability in the public sector
organisations with the results of document analysis on the trends and
approaches for enhancing financial sustainability in the South African local
municipality; and
 Enhancing credibility, dependability and transferability of the results of content
analysis.

1.9.3 Ethical Consideration

The study integrated measures for improving ethical practices during the research
process. Ethics refer to the moral principles that guide the process of the
accomplishment of a study. Such principles are often linked to confidentiality,
anonymity, respect and avoidance of harm to the participants in the study. In this
research, ethical considerations were upheld by ensuring confidentiality and
anonymity of the identities of the participants in the study. This is attributable to the
fact that since the study explores the determinants of financial sustainability, some of
the information solicited was sensitive. The upholding of principles of confidentiality
and anonymity therefore facilitated not only the respect of their wishes of their
identities not to be revealed, but also the avoidance of harm. To ensure that these
principles were upheld, relevant ethical guidelines obtained from the University were
signed and submitted for approval by the UFH Research Ethics Committee.

1.10. DELIMITATION
Financial sustainability is a challenge faced across most contemporary government
departments. However, this research was limited to the Department of Local
government. To enable the identification of major hurdles and appropriate solutions
that can be suggested, the study collected qualitative data from across the different
local government spheres. Since the study was limited on local government, it

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therefore implies if any other government department aims to adopt the new financial
sustainability theory suggested, it will be able to only do so subject to modifications
to suit their unique organisational conditions.

1.11. CHAPTER OUTLINE

This thesis is presented according to the seven main chapters that include:

 Chapter 1: Introduction and Background - This chapter provides the

research introduction and background.
 Chapter 2: Theories and Literature - Theories and literature relevant to the
study are evaluated in this chapter.
 Chapter 3: Financial Sustainability in the South African Local
Government - This chapter provides the overview of the regulatory
framework, approach, methods and techniques used for financial
sustainability in the South African local government.
 Chapter 4: Research Methodology - This chapter provides the description of
the research design and methodology used in the primary research process.
 Chapter 5: Analysis and Interpretation of Findings -The analysis and
interpretation of findings are presented in this chapter.
 Chapter 6: Discussions and Triangulation with Literature - This chapter
provides a discussion of the findings and triangulation with the relevant
theories and literature.
 Chapter 7: Conclusions and Recommendations: The discussions in this
chapter document the general conclusions and recommendations of the
study.

1.12. CONCLUSION
Despite the existence of appropriate local government financial sustainability
legislation and policy, the use of inappropriate financial sustainability model still
undermines the clear outline of critical activities that directors and managers in the
South African local government can replicate during initiatives for improving the
financial sustainability of the local municipalities and municipalities. It is, therefore,
against that backdrop that it is apparent from the discussions in this chapter that this
research aims to undertake relevant analysis of the financial sustainability theories
from which a financial sustainability model is extracted and scientifically tested to

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identify the key constructs and variables that influence the effectiveness of financial
sustainability in the contemporary public sector organizations.

However, considering complexities and lack of clarity of the nature of the paradoxes
of financial sustainability in the modern South African Department of Local
Government, the application of qualitative interviews was undertaken to discern how
the scientifically tested theory can be modified to offer a model that influences the
effectiveness of the initiatives for enhancing financial sustainability in the South
African local government. It is argued that this would render it possible for a new
theory on financial sustainability that can be proposed to directors and managers in
the South African local government.

While guided by this underpining research motive, the chapter oulines the research
purpose, objectives and questions as well as theories and methodology used in the
study. As the study concludes with a new theory on financial sustainability that can
be proposed to directors and managers in the South African local government, it is
argued that the overall ontological implications of this research are reflected in the
addition of a new theory onto the existing wealth of knowledge and theories on
financial sustainability. The discussions in the next chapter offer a synthesis of the
theories and literature on financial sustainability in the contemporary public sector
organizations.

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Chapter 2

LITERATURE REVIEW AND THEORIES ON FINANCIAL SUSTAINABILITY IN

THE PUBLIC SECTOR

2.1 INTRODUCTION
While guided by the four fundamental questions for this research, the discussions in
this chapter offer a synthesis of core theories on financial sustainability in the
contemporary public sector organisations. This analysis sets preface for evaluation
of the theories and models for financial sustainability of public sector organisations,
paradoxes of financial sustainability and theories on measuring and improving
financial sustainability of the contemporary public sector organisations.

2.2 FINANCIAL SUSTAINABILITY IN THE CONTEMPORARY PUBLIC SECTOR

ORGANISATIONS
Financial sustainability is a pre-requisite for effective performance of the
contemporary public sector organisations. It edifies the identification and elimination
of wastes and costly ventures (Provost, 2013). All these impact positively on the
level of resource optimisation. Considering the increasing pressure to respond to
array of endless demands for competing different services, the effectiveness of
resource optimisation enables public sector executives to effectively respond to such
demands. Such a view is consonant with the logic in the New Zealand’s Office of the
Auditor-General (2013:5) that financial sustainability does not only deal with the
generation of finances and revenues of the public sector organisations from different
sources, but also with the management and optimisation of the limited resources.
Financial sustainability, therefore, edifies the stretching of the limited resources to
facilitate the provision of as enormous services to as many geographical jurisdictions
as possible. Different authors define the notion of financial sustainability differently.
Others share similar views that financial sustainability refers to a strategic process of
generating public finances whilst also applying a combination of strategies to
optimise such resources and the limited public finances to enable effective meeting
of the different needs of the population (Parry, 2010). Some scholars construe
financial sustainability to connote the process effectively managing the existing
public finances to facilitate the effective implementation of different public sector
programmes and projects in a way that facilitates improving of economic growth and

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development. These definitions suggest that some indicators for measuring financial
sustainability of the contemporary public sector organisations may be linked to the
array of and sustainability of the existing sources of finances, resource optimisation,
and stimulation of economic growth and development.

Although such indicators can provide the appropriate basis to assess the financial
sustainability of the contemporary, quite often the ordinary financial and
accountability principles in the private sector to assess the financial health of a
government department by evaluating its overall liquidity, resilience, service and
fiscal responsibility and public trust and confidence. Liquidity measures financial
capabilities of a government department to meet its financial obligations as they fall
due (Parry, 2010). However, resilience evaluates a government department’s
financial capabilities to withstand all the sudden changes that may require a
contingent financial plan to respond, service and fiscal responsibilities that examine
the extent to which a government department is able to effectively meet its debts and
fiscal responsibilities.

Finally, trust and confidence refer to the extent to which a government department is
able to induce public confidence and trust in its financial and fiscal capabilities to
tackle all the economic and social challenges (Manuzi, 2015). In other words,
financial sustainably is a broad concept that covers different areas of a government’s
operation. However, maintaining the effectiveness of service delivery is not a good
measure for assessing financial sustainability of public sector organisations.
Attributable to such reasoning is the fact that while using an appropriate budget,
governments are often able to maintain the effectiveness of service delivery, in
certain cases; such services are being financed using debts that may affect future
financial sustainability. In that regard, financial sustainability seems to be a strategic
process of developing the existing financial capabilities of the government to
facilitate the meeting of the needs of the present generation and future generations.

It deals with the notion of inter-generational equity which is the process of meeting
the needs of present generations whilst also determining the effective meeting of the
needs and demands of the future generations can be enhanced. That implies, rather
than determining how to spend the available finances, broadening the sources of
public finances by investing in relevant projects and programmes is critical

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determinant of financial sustainability in the contemporary public sector
organisations. It refers to financial initiatives and strategies conceptualised and
applied by the modern public sector managers to facilitate the achievement of both
short and long-term goals. As public sector managers implement such strategies to
achieve both short and long-term goals over time, the integration of the necessary
flexibility and agility is a prerequisite (Ramphele, 2008).

Frequent volatile sudden changes can certainly destroy some of the sources of
public finances. In that regard, constant review and reconfigurations of the new
sources of public finances is a pre-requisite for improving financial sustainability of
the modern public sector organisations. Flexibility and agility are often encouraged
by the development of more compatible cultures, contingent planning and review and
application of new strategies that improve financial sustainability of the government
department in question. Such a view is echoed in Padilla, Staplefoote and Morganti
(2012:6) on the integration of financial sustainability in the strategic long-term
planning as one of the strategies for improving the financial sustainability of the
modern public sector organisations.

The undertaking of such an approach edifies the integration of the concept of

financial sustainability in different government investment programmes to be
undertaken. It also improves sustainability planning. In other words, financial
sustainability is often the end result of planning and investments that were, in certain
cases, undertaken decades ago. This suggests that without long-term financial
sustainability planning, it is often difficult for public sector organisations to realise
financial sustainability (Ramphele, 2008). Governments are faced with enormous
challenges and competing needs but also faced with the challenge of meagre
resources. This renders it difficult for most of the governments to achieve financial
sustainability. In that regard, long-term financial planning facilitates the outline of
critical activities that need to be prioritised to influence the achievement of financial
sustainability. The development and implementation of such long-term strategic
financial plans is often accompanied by constant monitoring and evaluation in
conjunction with the emphasis of the importance of accountability framework for the
responsible officials to be held accountable (Manuzi, 2015).

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2.2.1 Strategic Cyclical Financial Sustainability Management
It is common across the views of several scholars that the development and
improvement of the sustainability of the contemporary public sector organisations is
predicted by the use of the strategic cyclical financial sustainability framework that
entail environmental analysis, identification of the sources of revenues and revenue
generation, managing the utilisation of the generated revenues, and monitoring and
evaluation(Global Reporting Initiative-GRI, 2012; Oftelie & Sabety, 2013:19; Padilla,
Staplefoote & Morganti, 2012; New Zealand’s Office of the Auditor-General, 2013;
Queensland Government, 2011; Hardy, 2010).

2.2.2 Environmental Analysis

In any initiative for the development and improvement of financial sustainability of the
modern public sector organisations, environmental analysis is a pre-requisite. It
edifies the evaluation of the nature of expenditures of the existing government
departments. Such analysis is often undertaken to facilitate the identification and
elimination of the sources of wastage and costly initiatives (Global Reporting
Initiative-GRI, 2012). Some of the sources of wastage and cost escalations that
erode the financial bottom-line and sustainability of the modern public sector
organisations are often linked to corruption and unnecessary expenditures. Some of
the unnecessary expenditures often include uncalled for travel allowances and
parties as well as investments in the initiatives that do not contribute to the wellbeing
of the larger segments of the population. In the context of the South African public
sector organisations, some of these projects have been reflected in the development
of bicycle lanes that have been largely aimed at serving the interests of a few rich, as
compared to the largely impoverished population (Global Reporting Initiative-GRI,
2012).

The analysis during the initiatives for developing and improving financial
sustainability, therefore, enables public sector managers to identify and eliminate
such wastes. Such analysis also often extends to the evaluation of the social and
economic trends that are emerging to cause surges in the demands for public
services. Changes in demographical trends are often the prime sources of analysis
by evaluating the changes in migratory trends. Influx in migration implies that the
government will have to stretch its budget and expenditure on education, health and
other social infrastructure. However, when utilised and optimised effectively, the

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increment in population resulting from the corresponding increment in migration also
suggests increment in economic activities that the government can utilise to invest
and generate revenue from projects such as low cost housing.

Nevertheless, the analysis of the changes in demographical trends, including

changes in the internal migratory trends, is one of the factors often considered in
trends analysis (Padilla et al., 2012). Such analysis must be accompanied by the
evaluation of the influence of the factors such as globalisation on the perception of
the population about the quality of government services. The increasing demand for
quality service implies a surge in the expenditure that the government must incur
towards the review and improvement of the quality of its services. The review and
improvement of the quality of such services may require investment in new skills and
competencies, technology and infrastructure (Padilla et al., 2012). Nevertheless with
all the nature of government expenditure evaluated and understood, the next
initiative may require the analysis and identification of how sufficient funds can be
generated in conjunction with the optimisation of the limited resources to facilitate the
financing of such expenditures and effective meeting of the needs and demands of
the present and future population (New Zealand’s Office of the Auditor-General,
2013).

2.2.3 Identification of Revenue Sources

The evaluation and identification of the sources of revenue enhances the
improvement of the contributions from the existing sources of revenues and the
generation of the new sources of revenues. To accomplish such analysis, public
sector managers often explore the adequacy of the existing sources of revenues and
the extent to which they are able to facilitate the effective implementing of the
existing and future projects. Some of the major sources of government revenues are
often linked to taxes that include income tax and import and export duties (New
Zealand’s Office of the Auditor-General, 2013). Others are linked to the donations
and grants from local businesses and foreign governments, as well as fundraisings
and individual contributions. These are common sources of government revenues.

However, increasingly, governments are becoming more creative and innovative to

develop new sources of government revenue. Such initiatives are being undertaken
by improving strategic alliances and partnerships with the private sector to facilitate

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the effective development of income generating projects from which governments
can draw their revenue. This is often accompanied by the improvement of the
investments in public sector enterprises so as to improve the direct generation of
government revenues from the profits made by those public sector enterprises. Such
initiatives are being undertaken, and it is critical to explore the essence for the
improvement of the investment climates to lure more foreign and location
investments into the country (New Zealand’s Office of the Auditor-General, 2013).

Some of the strategies that can be used in the achievement of such initiatives may
include the development of appropriate democratic system of governance,
compatible immigration and banking laws and further de-regulations and
liberalisation to improve the process for business registration and commencement
(Queensland Government, 2011). The improvement of the investment climate of the
country influences the increment of the rate of foreign direct investments that
subsequently impact positively on the increment of economic activities. The
increment of economic activities influences the boost of economy that in turn edifies
the expansion of the taxable base and improvement of the level of revenue
generation from taxes. As the government configures its present and future sources
of revenues, it is also often critical to adopt the appropriate techniques for managing
the utilisation of the collected revenues (Queensland Government, 2011).

2.2.4 Managing the Utilisation of Generated Revenues

Managing the utilisation of generated revenues requires the development application
of the appropriate accounting and financial techniques and methods to influence the
use of meagre finances in the implementation of as many government programmes
as possible (Oftelie & Sabety, 2013:19). This is a critical step in the initiative for the
improvement of financial sustainability in public sector organisations. Public sector
organisations constantly face the challenge of meagre financial resources to
enhance the improvement of service delivery to as many citizens as possible. This
implies that techniques that the public sector managers are able to adopt and apply
in this step are critical for minimizing waste and costs to create excess funds that
can be used in the implementation of the future government programmes. In this
regard, some of the techniques that can be used may require the adoption of
parsimonious accounting measures in conjunction to the emphasis of transparency
and accountability (Oftelie & Sabety, 2013:19).

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A combination of such measures would influence the minimisation of costs and
wastes linked to either lack of skills or corruption that cause the theft and waste of
public resources. This is often accompanied by the initiative for ensuring that certain
critical activities that catalyse other activities and projects are implemented first in the
ranking order. Such a view is accentuated in the fact that some of the government
projects are catalysts that influence successful implementation of other projects
(Hardy, 2010). Such projects generate revenue that provides funds for the
implementation of other projects. In other words, the techniques that public sector
managers determine the available financial resources will be used in a way that
either supports or constrains the improvement of financial sustainability of the
modern public sector organisations. Nevertheless, as appropriate critical techniques
are being adopted to influence the effective management of the utilisation of the
generated revenues, they must be accompanied by the adoption and use of the
appropriate framework for monitoring and evaluation of the effects on financial
sustainability.

2.2.5 Monitoring and Evaluation

Monitoring and evaluation is a process of assessing whether the different activities
and measures undertaken are impacting positively on the improvement of financial
sustainability. However, monitoring and evaluation are distinct from each other.
Monitoring is a long-term on-going process of assessing and reviewing whether the
process for the implementation of a particular government programme is influencing
the achievement of the desired strategic objectives and goals. Evaluation is a short-
term process of assessment often aimed at analysing whether the implementation of
certain specific programmes are influencing the attainment of the outlined short-term
goals and objectives (Oftelie & Sabety, 2013:19). That implies whereas monitoring
may entail the evaluation of several projects at the same time, evaluation may only
involve the analysis of one project. Despite the differences, monitoring and
evaluation are still critical for the identification and elimination of the deviations,
glitches and wastes that may affect the improvement of financial sustainability. To
enhance the identification of deviations, glitches and wastes, monitoring and
evaluation may require the use of a combination of qualitative and quantitative
techniques (Hardy, 2010). The qualitative techniques that can be used may entail the
use of focus group discussions, interviews, meetings and documents’ analysis to

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explore the perceptions of the employees and other critical stakeholders such as the
citizens or the communities. Quantitative techniques often involve the use of surveys
and statistical analysis to identify and gauge the areas that activities may have been
successful or failed (Oftelie & Sabety, 2013:19). The effective application of
techniques may influence the identifications of the areas of major deviations.

Depending on the deviations identified, some of the improvement measures that may
be adopted include training and development of the skills and competencies of the
employees, investment in the appropriate technology, strategic partnerships and
alliances with the relevant stakeholders and investment in the appropriate
infrastructure. The other improvement strategy may require investment in the
development of new source of revenues to improve overall financial sustainability of
the government department. The increasing emphasis of financial sustainability of
the contemporary public sector organisations is attributed to the evolution of the
notion of New Public Sector Management in the 1990s.

2.2.6 New Public Sector Management and Financial Sustainability

It is the fundamental thinking in the notion of New Public Sector Management that for
the contemporary governments to perform more effectively, the adoption of more
efficient operational systems is a prerequisite (Global Reporting Initiative-GRI, 2012).
The adoption of more efficient operational systems influences cost-savings and
resource optimisation that impacts on the extent to which the government is able to
use the limited financial resources to meet as an array of competing needs of the
population as possible.

However, to achieve such values of improved governmental efficiencies, it is the

argument in the notion of New Public Sector Management that cost monitoring and
evaluation, performance evaluations as well as training and development are critical
for enhancing the effective performance of the modern public sector organisations.
Effective application of the strategies that spawn operational efficiency often drives
down costs that spur a government’s department’s cost minimisation (Global
Reporting Initiative-GRI, 2012). The ability of a government department to achieve
enormous cost savings often instigates improvement of the extent to which the
executives in the public sector are able to invest such extra funds in other projects
that create more sources of revenues.

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However, initiatives that spur improvement of cost savings is not a once off-event. It
is a continuous process improvement requiring constant rethinking and analysis of
not only the cost effectiveness of the process, but also the adoption of more lean
operational systems and innovations to constantly introduce new measures that
influence improvement of cost savings (Padilla, Staplefoote & Morganti, 2012). This
implies that financial sustainability of a government department may only be
attainable if the government department is able to invest in relevant measures that
enable it to attain cost leadership. The achievement of cost leadership would require
the government department to invest in the measures that offer effective leadership
and direction, systems and information, processes, people and organisation.
Leadership and direction offer the vision and objectives that influence how activities
are accomplished in line with the defined strategies to enhance the achievement of
such objectives and goals (Padilla et al., 2012). In terms of the drive to improve
financial sustainability of a government department, such objectives and strategies
must be objectives and strategies that drive down costs and improve the investment
of funds in the right places to generate the desired sources of revenue.

Part of the strategies to leverage cost minimisation would require investment in

relevant technologies and systems to improve the way services are delivered to the
population and minimise costs and induce financial values that can be invested in
other areas. In addition to developing and using appropriate operational processes,
the other approach would require investment in the training and development of the
employees (New Zealand’s Office of the Auditor-General, 2013). Improved employee
skilfulness spurs the improvement of a government department’s operational
efficiency on the basis that more skilful employees often tend to be more creative
and innovative to conceptualise and develop better ways of accomplishing different
tasks. However, to ensure that the government department is performing in the way
that edifies achievement of financial sustainability, constant monitoring and
evaluations of the employee performance is a prerequisite. Performance
management and appraisal influence investment in measures that improve
employee capabilities to achieve the desired strategic objectives and goals. It also
enhances improvement of a government department’s operational efficiency and
cost minimisation that, in turn, may contribute to the improvement of financial
sustainability (New Zealand’s Office of the Auditor-General, 2013). However, most

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contemporary scholars argue that if public sector organisations are to adopt the
appropriate measures and attain financial sustainability, then the development and
application of the appropriate financial sustainability model is a pre-requisite.

2.3 MODELS FOR FINANCIAL SUSTAINABILITY OF PUBLIC SECTOR

ORGANISATIONS
To gain a detailed understanding of how to measure and improve financial
sustainability in the contemporary public sector organisations, models for financial
sustainability of public sector organisations are evaluated and examined in this
section. These three main models encompass four pillars of financial sustainability,
five capitals’ theory of financial sustainability, and three foundational constructs
(financial risk management, financial governance & financial leadership) financial
sustainability.

2.3.1 Four Pillars of Financial Sustainability

Leon’s (2001) four pillars of financial sustainability has been one of the fundamental
techniques for improving financial sustainability in public sector organisations a
decade. However, it is still widely recognised by several scholars as one of the
critical determinants for improving financial sustainability in the contemporary public
sector organisations. To edify the improvement of financial sustainability, Leon’s
(2001) four pillars of financial sustainability highlight four fundamental pillars that the
public sector managers can pay attention to. These four pillars are: strategic financial
planning, income diversification, sound financial management and administration
and income generation.

2.3.1.1 Pillar 1: Strategic Financial Planning

A strategic financial plan refers to a framework outlining the vision, mission and
goals as well as the corresponding critical activities that must be accomplished to
influence the achievement of the desired strategic objectives and goals. Strategic
financial planning edifies the prioritisation of the activities critical for improving the
sustainability of a public sector organisation. It outlines the critical investment
programmes and projects that must be undertaken to generate funds and improve
the overall financial sustainability of the government department (Oftelie & Sabety,
2013:19). It provides guidelines and directions on the initiatives that must be
undertaken to achieve the financial sustainability objectives. However, some of the

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authors reiterate the essence for linking strategic financial plans to the overall
development plans or the strategic plan of the government department. Such a view
is accentuated in the fact that linking strategic financial planning to the development
plan enables public sector managers to analyse and configure how existing and
future developmental programmes can be supported by existing and future sources
of funds.

It is such a linkage that motivates public sector executives to evaluate and assess
how most of the existing and future development plans and programmes can be
undertaken. It fills the gap in most strategic development planning processes in
which most government departments often focus only on development plans rather
than the linkage to the critical sources of funds that can be used in the financing of
such programmes (Oftelie & Sabety, 2013:19).

It is not only the linkage of the development plan to the strategic financial plan which
is often a challenge, but also the tendency of public sector executives to misconstrue
a strategic financial plan to be budget. Strategic financial plan is distinct from a
budget. A budget is a plan of how the available finances will be utilised in the
process of the implementation of different government programmes. On the other
hand, a strategic plan is a dynamic framework outlining the critical process of how to
generate the required funds in conjunction with the analysis of how to optimise the
existing financial resources (Ball, 2007). The value of a strategic plan as a critical
determinant of financial sustainability is strongly echoed in the opinions of several
other scholars. It enhances the evaluation and comparison of the sources of funds
that are critical for a government to fulfil developmental needs. However, it is critical
that it is accompanied by the development of the framework for improving a
government department’s income diversification.

2.3.1.2 Pillar 2: Income Diversification

Income diversification refers to the process of developing an array of the sources of
income for the government. Financial sustainability of a government department
depends on the availability of different sources of funds. That implies that reliance on
only a few sources of income for the government department can undermine the
extent to which it can be sustainable in the future. It is, therefore, critical for
government departments to become more creative and innovative in the

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development and implementation of a combination of different innovative
programmes that generate incomes (Ball, 2007). Some of the major sources of
government incomes are often linked to revenue collected in taxes. In other words,
taxes are the common sources of government revenue. However, considering the
increase in the service provision initiatives and government programmes that must
be financed, sole reliance on taxes as the major source of income is often the major
cause of why most of the government departments are not financially sustainable.
For government departments to be sustainable, sources of income must span across
taxes to encompass development of services and products that can be sold to the
communities (Padilla, Staplefoote & Morganti, 2012).

In most high performing economies, such initiatives have often been undertaken by
developing cost-sharing services so that governments do not just invest and waste
their resources, but also become able to recoup some revenues. Some of the areas
where cost-sharing services have emerged include education, hospital services, use
of parks and roads. Cost-sharing influences the extent to which some of the major
government services are able to become sustainable (Adams, Muir & Hoque,
2014:46). This is attributable to the fact that with cost-sharing, the government does
not have to meet the full cost of providing public service, but only part of it (Padilla et
al. 2012). This improves financial sustainability that for as long as communities are
willing to meet part of the costs of running such service outlets, the government is
assured of the source of revenue.

Besides taxes and developing cost-sharing services, the other sources of

government revenues are often latent in the development of the government public
enterprises in different sectors such as transport, agriculture and energy. Through
these public sector enterprises, governments are able to generate funds that are not
only used in the running of such enterprises, but also in the financing of other
projects to generate new sources of funding.

However, challenges have arisen from the fact that in most developing countries,
effective management and performance of most public sector enterprises have often
been undermined by corruption and political interference that lead to the deployment
of less experienced and skilful political appointees. As the running and management
of public sector enterprises are punctuated by such challenges, the running and

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managing of public sector enterprises tend to, instead, turn into major sources of
burdens that affect the financial sustainability of the contemporary governments. The
implications are often latent in the fact that as governments seek solutions to
improve the sustainability of public sector enterprises, they have often opted for
privatisation.

Privatisation is the sale of major government entities to ensure that they are
entrusted in private hands to run efficiently. As privatisation of public sector
enterprises is undertaken, governments tend to turn to taxes as the major sources of
government revenues. Taxes depend on the performance of the business and
therefore, it is often an unreliable source of revenue. Although investment in an array
of different government projects is a pre-requisite for income diversification,
challenges often still arise from lack of motivation and incentives for more creative
employees in the public sector to innovate and diversify the sources of income
(Adams et al., 2014:46). Such circumstances affect income diversification and
improvement of the financial sustainability of the contemporary government
departments. Nevertheless, as governments seek to improve income diversification
as one of the pillars for improving financial sustainability, it must be accompanied by
the improvement the nature of financial management and administration.

2.3.1.3 Pillar 3: Financial Management and Administration

The overall effectiveness of financial management and administration is one of the
pillars that predict the effectiveness of financial sustainability in the contemporary
public sector organisations (Baret, Hida, Hatfield & Sandford, 2013). Financial
management is a process of planning, organising and controlling the process for the
generation and utilisation of the available public financial resources in the
implementation of different government programmes. Financial management,
therefore, facilitates the effective and efficient development of different programmes
to generate the required funds. It edifies the implementation of the strategic financial
plan that which is a framework outlining critical activities for the generation and
utilisation of the relevant public resources (Baret et al., 2013). When used in
conjunction with the establishment of an effective public financial administrative
system, it can edify the efficiency of the process for the utilisation of public
resources. Financial administration on the other hand is a process of controlling and
putting in place the necessary mechanisms to effective generation and utilisation of

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the available public finances. It is through sound financial management and
administration that government departments are able to translate the process for the
implementation of the strategic financial plan into practical and tangible realities that
influence the change and transformation of the socio-economic living conditions and
standards of the population (Baret et al., 2013).

To enhance the achievement of the desired public values, public financial

management and administration is often integrated with the necessary control and
accounting improvement measures. It also involves the exercise of the oversight
roles and the upholding of the principles of good governance which are outlined in
King 1, 11 and 111 to encompass transparency, responsibility and accountability.
However, challenges have often still arisen from the lack of the critical skills in the
fields of accounting and financial management (Bergmann &Grossi, 2014:90).
Insufficient accounting and financial skills in the public sector affects the
development and application of the necessary critical accounting skills to optimise
the limited public finances and improve the overall financial sustainability of the
contemporary public sector organisations. As most public sector organisations in
developing countries struggle to deal with the issue of lack of sufficient accounts and
financial experts, they have often opted for the use of the externally hired consultants
and experts.

Although such a strategy edifies the filling of the skill gaps, challenges usually arise
from the fact that private external accounts and financial consultants are usually too
expensive. Exorbitant fees charged by private accounts and financial consultants
often tend to reduce the financial bottom-lines of most public sector organisations,
and in turn subsequently undermine their financial sustainability (Bergmann &Grossi,
2014:90). This is attributable to the fact that in most cases, accounts and financial
experts are hired not to innovate and develop revenue generating programmes that
can be adopted by public sector organisations, but merely to facilitate the strategic
planning and utilisation of already generated revenues. To counter some of the
weaknesses of public finance management and administration, some high
performing public sector organisations have often opted to developing and improving
the internal accounting and financial measures and improving the internal skills and
competencies of the accounts and financial staff. However, even if the effectiveness
of public finance management and administration improves, it is often not only the

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public finance management and administration which is a critical determinant of
financial sustainability, but also its linkage to the capabilities of the public sector
institutions to conceptualise and generate own sources of income.

2.3.1.4 Pillar 4: Own Income Generation

It is fundamental reasoning that financial sustainability of contemporary public sector
organisations depends on the extent to which they are able to generate own income.
This is attributable to the fact that financial sustainability of a public sector
organisation depends not only on how the existing public finances are effectively
utilised, but also on the generation of enormous new sources of income (Birney,
Clarkson, Madden, Porritt &Tuxworth, 2010). The embracement of pillar four that
deals with the generation of own incomes therefore supplements the utilisation of
pillar two of financial sustainability that deals with income diversification. In the
application of pillar four, some sources of public finances that have been invented
include: the initiation of contributions to trusts or endowment funds, fundraising for
institutional building and operations, income generation through public contributions,
income generation by selling goods or services, business developments, income
generation by effective financial management and strategic partnerships and
alliances with corporate.

Income generations through establishment of a trust or endowment funds is often

accomplished by developing a trust fund and encouraging pledges to be made
(Birney et al., 2010). Such funds are often deposited on interest-bearing accounts to
generate more funds that can be used to supplement the consolidated budgets
selected government departments. Such supplements of the existing government
budgets trust or endowment funds, therefore, contribute enormously towards the
improvement of the financial sustainability of the contemporary public sector
organisations. This is often accompanied by the development of fundraising
schemes whereby using largely political connections and links with the communities,
the government department organises fundraising to finance certain specific projects
(Birney et al., 2010).

Although fundraising is a once off, it can still help supplement the budgets of certain
projects. In that regard, it contributes enormously to cost savings that in turn impact
positively on the improvement of financial sustainability in the contemporary public

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sector organisations (Bouchal & McCrae, 2014). Besides fundraising, the other
strategy for generating own income to improve the financial sustainability of a
government department is often linked to contributions from the public. Through
schemes, the government may encourage wealthy individuals to contribute funds in
return for tax concessions. Although it is unreliable, as it depends largely on the
individual will, it is often one of the strategies of generating additional funds that can
improve the financial sustainability of a government department.

In contrast to contributions where the government has to rely on the will of the
individuals, income generation through sales of goods or services is often more
reliable (Bouchal& McCrae, 2014). This is because the government department may
either generate new goods and services that it sells, or it can establishment an
effective asset management system through which the existing assets are effectively
managed and later sold during replenishment.

Although such a mechanism contributes to the enlargement of the government

sources of revenues, challenges often still arise from under-selling the assets by the
government officials to themselves. Such situations affect generating of sufficient
funds to influence the improvement of financial sustainability. Whereas some of the
sources of revenues may be developed by establishing government owned
businesses, other strategies involve undertaking effective financial management so
as to improve cost savings and generate more revenues (Burritt, Thoradeniya&
Chika Saka, 2005). Such initiatives are often accompanied by strategic alliances with
the corporate to develop specific initiatives that enlarge sources of government
revenue.

2.3.2 Five Capitals’ Theory of Financial Sustainability

Linking the notion of financial sustainability to the concept of sustainable
development is one of the critical factors that influence the improvement of financial
sustainability in the public sector organisations. This is attributable to the fact that the
integration of the concept of sustainable development fosters the development of a
culture of sustainability thinking among public sector managers (Organisation for
Economic Co-Operation and Development-OECD, 2009). With time, such thinking
tends to induce a management approach that seeks to explore all forms of risks and
wastes that may affect financial sustainability. The notion of sustainable

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development refers to the extent to which while using a given set of financial
resources and non-financial resources, a government is able to consistently
implement a plethora of programmes and projects without exhausting the source of
capital (Klinz, 2011). In that context, it is quite evident that the notion of sustainable
development shares similar meaning with the concept of financial sustainability by
emphasising the essence to continuously develop new sources of government funds
whilst also efficiently utilising the existing resources to meet the needs of the present
and future generation (Panayotou, 2009:2). Such a view is accentuated in the theory
of five capitals’ model that also highlights five principles of sustainable development.
In the theory of five capitals’ model, it is reiterated that sustainable development is
measured by the extent to a government department is able to conceptualise and
implement a series of different projects without running or exhausting the sources of
capital that include natural capital, human capital, social capital, manufactured
capital and financial capital.

2.3.2.1 Natural Capital

Natural capital refers to the resources that are extracted from nature to be used in
different development activities. Such resources often include minerals, water energy
and solar. To enhance sustainability of the natural capital, it is critical that the public
sector executives undertake the relevant measures to improve the rate of the
optimisation of the limited natural capital (Organisation for Economic Co-Operation
and Development-OECD, 2010). This is often accompanied by the assessment of
the strategies for optimising the available human capital by training and development
to improve their skills and competencies. Such initiatives are often accompanied by
the application of the strategies that enhance the sharing of the limited skilful human
resources and sharing across the board.

2.3.2.2 Human Capital

In other words, improvement of the level of the optimisation of natural and human
capitals induce conditions that edify the creation of the circumstances that generate
revenues that, in turn, can influence the overall improvement of the financial
sustainability of a public sector organisation (Panayotou, 2009:2).Besides the
development of an appropriate succession plan to enhance human resource
replenishment, the other strategy often entails investment in the education and
training of the population on the areas of scarcity. It is not only the optimisation of

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natural and human capital that influences the improvement of sustainable
development and subsequently financial sustainability of the contemporary public
sector organisations, but also social capital.

2.3.2.3 Social Capital

Social capital refers to the resources and capabilities derived from the structures,
relationships and networks that a government department is linked to. Social capital
derived from relationships and networks influences the improvement of information
exchange and sharing as well as the sharing of facilities and resources (Klinz, 2011).
In the end, it edifies minimisation of waste and optimisation of resource utilisation
along the chains. This can subsequently bolster the generation of new sources of
revenue that impact on the improvement of public sector organisations ’financial
sustainability. However, some authors argue that unless such initiatives are
accompanied by the initiatives for improving the optimisation of the manufactured
capital, it may not be reasonably possible to realise significant improvement of
financial sustainability.

2.3.2.4 Manufactured Capital

Manufactured goods refer to machines, equipment and tools used in the
accomplishment of different activities in the contemporary public sector
organisations. The improvement of the level of optimisation of the manufactured
capital is often edified by the development and use of the appropriate maintenance
plan and scheduling in that all the machines are effectively utilised to influence
improvement of throughput (Watt &Botsch, 2010). Unfortunately, that is not the case,
as in most instances, the utilisation of capital machines have not been accompanied
by the development of the appropriate maintenance plans. The implications are often
reflected in the fact that effective utilisation of the manufactured capital tends to be
undermined by frequent machine failures that affect the efficiency of the
manufactured capital. Poor maintenance also causes the circumstances where
accumulated defects tend to cause failures that either destroy the manufactured
capital for ever or are often quite costly to repair. This affects the sustainability of the
manufactured capital and impacts positively on the improvement of financial
sustainability and sustainable development (Watt & Botsch, 2010).

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2.3.2.5 Financial Capital
Financial capital is related to the actual physical liquid cash and how it is used in the
implementation of different government projects as well as the meeting of different
liabilities (Organisation for Economic Co-Operation and Development-OECD, 2010).
Financial sustainability is measured by the extent to which public sector managers
are able to continuously accomplish such activities without exhausting the existing
financial reserves. Despite the fact that the use of the five capitals’ model can
influence fostering of a culture of sustainability among public sector managers, some
of the scholars still argue that it is critical for proponents of sustainability to put
forward a strong case for the adoption of sustainability initiatives in all areas of the
operations of the public sector organisations. Such reasoning is derived from the
argument that the major hindrances of the development of financially sustainable
public sector organisations are often linked to the poor embracement of sustainability
(how to implement most sustainability measures remains largely on paper).

The reasons that are often advanced to lure public sector managers to adopt
sustainability concept are often linked to four arguments that include public value,
societal case and the organisational case (Organisation for Economic Co-Operation
and Development-OECD, 2010). Public value advances the argument that the
improvement of financial sustainability creates enormous public values for the
population. Some of these public values are often linked to the improvement of
efficiency, declining costs, the provision of an array of services, improvement of the
quality of public services and better responsiveness to the needs of the public.

According to the argument in the public value theory, all these influence the
improvement of public trust and confidence that improve relationships between the
citizens and government and subsequently cause harmony that provides a
favourable environment for the implementation of other programmes and projects.
Such arguments are often accompanied by putting across the societal values for the
embracement of sustainability measures. Societal arguments are often linked for the
government to improve its financial sustainability and overall sustainability to
intervene in case of market failures that may affect the quality and standards of living
of the population. Societal arguments are also motivated by the need to improve
sustainability so as to improve the resilience of the public sector organisation to

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withstand all forms of social and economic failures that may affect the social and
economic system of the country (Watt &Botsch, 2010).

The need to intervene, to mitigate the social and economic impact of market failures,
and to improve the resilience of the public sector organisation is usually
accompanied by the argument that public sector organisations have a social contract
with the citizens to deliver according to their demands and needs. On the other hand,
the organisational case for improving the financial sustainability and the overall
sustainability of public sector organisations are based on the fact that the
improvement of sustainability is critical for improving efficiency, better risk
management and cultivation of better reputation with all the relevant stakeholders. In
other words, the integration of the concept of sustainable development in the
initiatives for improving financial sustainability provides the conditions that render it
possible for the development of the culture and measures that improve the financial
sustainability of the contemporary public sector organisations.

2.3.3 Parry’s (2010) Three Foundational Constructs (Financial Risk

Management, Financial Governance & Financial Leadership) for Financial
Sustainability
Theories imply that the three foundational constructs that influence effectiveness of
public sector Financial Sustainability are often associated with Financial Risk
Management, Financial Governance and Financial Leadership (Beasley, Branson
&Hancock, 2009:28; Borgelt & Falk, 2007:122; Buttimer, 2011).

2.3.3.1 Financial Risk Management

Financial risks are events or incidents that can affect the ability of the public sector
organisations to either generate enormous revenues from different sources or utilise
the available revenues in the accomplishment of the implementation of as many
different government programmes as possible (Fereday & Muir-Cochrane, 2006:29).
The overall effectiveness of financial risk management is a critical predictor of the
effectiveness of the process that can influence the improvement of the financial
sustainability of the modern public sector organisations. Financial risk management
edifies the evaluation, identification and elimination of incidents or events that either
causes managers to incur costs that would have been used for some other projects

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or fail to achieve the desired financial goals and objectives (Beasley, Branson &
Hancock, 2009:28; Borgelt & Falk, 2007:122; Buttimer, 2011).

The contemporary notion of financial risk management evolved from the ancient
concept in which risk management took a narrow perspective of only focusing on
health and safety risks. As much as health and safety risks are also associated with
certain financial risks and implications, the introduction of the concept of the
organisational-wide risk management has influenced the evolution of a wider and an
integral process of risk analysis, identification and mitigation. In the undertaking of
such an approach to financial risk management, other forms of risks that may also
affect the financial sustainability of the public sector organisations are often linked to
political risks, economic risks, social risks, environmental risks and operational risks.
Although the adoption of an appropriate framework can influence effective
management and mitigation of financial risks, risks arising from the occurrence of
political risks, economic risks, social risks, environmental risks and operational risks
can still cause financial risks (Ngoepe, 2014:5; Peterson, 2005:7). It is therefore
suggested that unless an integral framework for managing financial risk is adopted,
other forms of risks can still cause incidents that affect financial management and
sustainability of the contemporary public sector organisations.

Increasing globalisation and complexities, therefore, implies that public sector

executives must effectively integrate financial risk management in the decision
making processes, strategies and structures. Such initiatives are often accompanied
by the development of a more risk adverse culture among the employees and senior
managers. However, challenges often arise from the level of bureaucracy in the
public sector organisations that often affect flexibility and agility to identify and
respond to the sources of financial risks before they occur and cause devastating
effects on the organisational performance. To enhance the effective management of
financial risk management as one of the edifiers of financial sustainability in the
modern public sector organisations, the findings of the research conducted by the
Queensland Government (2011:3) imply that the replication of a framework akin to
the one used for risk management in the public sector is a prerequisite. The
effectiveness of the process of managing financial risk is reiterated throughout
theories to entail three main steps that include: risk analysis and identification,
measurement and intervention.

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Risk analysis is the process of evaluating the organisational context and the
associated inherent risks. It requires the assessment of the external and internal
environment so as to identify the prevailing risks and the most likely foreseeable
events that may occur and affect the effectiveness for the implementation of different
government programmes (Fereday& Muir-Cochrane, 2006:29). In the evaluation of
the external environment, attention is often directed towards the analysis of factors
such as the political changes and trends, and the economic changes that may affect
capabilities of the public sector organisations to deliver on their objectives.

Such analysis must be accompanied by the evaluation of the organisation’s risk

profit, risk appetite and risk tolerance levels, risk matrix and responsibilities, and the
effectiveness of the financial risk management plan used by the managers. This
analysis is usually undertaken in conjunction to the analysis of how if such risks
occur, can interfere with the achievement of the desired strategic objectives and
goals of a government department. In addition to financial risks, Hardy (2010:5)
highlights that as such analysis is being undertaken, other critical risks that the
process of analysis must focus on include health risk, security risk, transportation
safety risks and operational risk. The analysis of financial risks must focus on the
analysis of the changes in factors such as interest rates, prices and market failures
that can lead to price increases that in turn affect cost savings. Health risks are
linked to the probability of the emergence of new health issues or an outbreak of
epidemic that can affect the health of the population and require enormous funds to
address it.

The evaluation of such risks enables the executives in public sector organisations to
put in place the necessary contingent financial and non-financial measures to
prevent the occurrences of such health risks or mitigate its financial implications if it
occurs (Hommen & Rolfstam, 2009:17; Naude & Ambe, 2013:112). At the same
time, financial sustainability of the public sector organisations is often affected by
security risks. Security risks refer to the probabilities of the occurrence of incidents or
events that can affect the safety and political stability in a country. This implies that if
such events occur, they can be costly to mitigate, thereby leading to the utilisation of
enormous funds that can affect the sustainability of a government department. In
other words, since security and safety of the country is a priority, the probability of

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the occurrence of security related risks often cause the diversion of funds that could
have been used for some other useful development purpose. The public sector
managers strive to balance meeting such hefty security costs with the costs of other
developmental activities, the hefty costs required tend to erode the financial bottom-
line of a government department, and subsequently also its financial sustainability.
Besides security risks, other forms of risks that also often affect the financial
sustainability of the modern public sector organisations are often related to
transportation safety and operational risks.

Risk analysis often leads to the identification of the risks that are most likely to affect
the effective performance of a government department. The identification of such
risks paves way for the evaluation of the intervention measures that must be
undertaken (Pricewaterhouse Coopers, 2014:19; Tcankova, 2002:290). The forms of
financial risk intervention measures undertaken often include treating the risk,
transferring the risks, terminating the risks or taking the opportunity. Risk treatment
involves the application of the strategies that reduce or completely prevent the risks
or the impact of the risks from occurring. In effect, risk treatment may take the form
of preventive controls, corrective controls and directive controls. Whereas preventive
controls limit the possibility of the undesirable events from occurring, corrective
controls seek to reverse the undesirable outcomes by undertaking the necessary
remedial measures.

Directive controls refer to the initiatives of mitigating undesirable outcomes to ensure

that the desired outcomes are achieved in the midst of all risks. Risk transfer deals
with the process of transferring the burden of bearing the risk to the third party, as on
the other hand, risk termination is often only accomplished by terminating the activity
in order to minimise the emergence of the undesirable outcomes. Other risk
mitigating measures are often accomplished by developing and applying the risk
management framework to ensure development of a risk management culture and
that financial risk management is integrated in all critical decision-making processes.
However, it is critical that such initiatives are undertaken in conjunction with the
measures for continuously monitoring and evaluating the impact of the undertaken
measures on the mitigation of the identified risks. As managers adopt a strong

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culture of financial risk management, it is also often critical that it is accompanied by
the development of a system for effective financial governance.

2.3.3.2 Financial Governance

Financial governance refers to a framework of structures methods, systems,
procedures and regulations put in place by the public sector organisations to
facilitate the optimisation of the public financial resources for the achievement of
objectives and goals that provide the greatest good for the greatest number of the
population. Public finance governance is significantly associated with ethics as it
seeks to develop and apply a financial management system that encourages
transparency, responsibility and accountability of public officials involved in the
generation and utilisation of public finances (Jeppesen, 2010; Liebowitz, 2007:44;
Marx, 2008:29).

Using a combination of systems put in place, financial governance facilitates the use
of a combination of the proactive and reactive measures to influence the
management of public finances. The proactive measures are reflected in the
emphasis of consultation and involvement of different stakeholders in the financial
decision making of the public sector organisations. On the other hand, reactive
measures entail having public officials account for their financial decisions. It is,
therefore, certain that through the use of a combination of these proactive and
reactive financial control systems, the overall effectiveness of financial governance
edifies the improvement of the financial sustainability of the public sector
organisations. It prevents wrong financial decisions from being made which, in
conjunction with the application of the other measures, edifies the elimination of
waste and costs. All these translate into cost savings that in turn, impact positively
on the increment of the financial bottom-line of the public sector organisations.

In other words, financial governance facilitates the development of systems, control

measures, financial risk management and behavioural change and transformation
that influence the reduction of the wastage of financial resources and the
improvement of the financial sustainability of the public sector organisations. From
the theories on financial governance, it is quite evident that financial governance
comprises three critical attributes that influence its overall effectiveness. These three
attributes include transparency, accountability and responsibility. Transparency is the

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openness of the financial decision making process. It requires the involvement and
consultation of the relevant stakeholders in the decision-making process. It is
through such involvements and consultations that public officials are able to share
information and reach the best conclusions on how the available financial resources
can be optimised for the greatest good of the population.

As public sector managers make decisions, they are often required to respond and
account for their decisions. Accountability is a control process that requires public
officials to explain and justify the reasons for certain undertaken financial decisions.
This attracts responsibility of the public officials to be held accountable and to
explain the basis of their financial decisions. In effect, the overall effectiveness of
financial governance is measured by the extent to which it has in place the
necessary structures, documents and policies on financial responsibilities, reporting
and risk management processes to edify the overall effectiveness of financial risk
management. Although the effectiveness of financial governance is predicted by the
use of a framework that encourages transparency, accountability and responsibility,
it is still often critical that it is linked to the process of financial management, control,
supervision and accountability.

Financial governance refers to the extent to which the process of governing

planning, organising and control ensures that the process for the utilisation of the
available financial resources enhances the achievement of the desired outcomes.
Financial control, on the other hand, is the process of evaluation and monitoring to
identify and eliminate defects to ensure that all the financial wastes and costs are
eliminated. Control is often undertaken in conjunction with supervision to ensure that
public managers and executives exercise the necessary supervisions and control to
identify and correct deviations from the outlined strategic financial plan.

Besides the overall effectiveness of financial management, control, supervision and

accountability, financial governance is also often edified by the development and
establishment of administrative, legislative, judicial and political measures.
Administrative measures are the internal controls exercised by financial committees,
managers and in the case of the municipalities, the municipal council, to ensure that
all the financial decisions are undertaken in a way that minimise wastes and
influences the optimisation of limited financial resources. In addition to the internal

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administrative controls, the other administrative controls are external and may
include the office of the public protector and the office of the auditor-general.
Legislative mechanisms exercise oversight functions over financial decisions
undertaken by the administrative units. Some of the legislative mechanisms that
influence the effectiveness of financial governance in the public sector organisations
include the municipal oversight committees, public accounts committee of the
provincial legislature, and the public accounts committee of the national assembly.

The judicial mechanisms may require use of the normal court structures while on the
other hand, political mechanisms may entail the engagement of the opposition
political parties to question and ask administrative bodies or the members of the
ruling government to explain and account for the undertaken financial decisions.
From these theories, it is quite evident that financial governance provides the
necessary controls that influence the management, control and optimisation of the
limited public financial resources. It is through such mechanisms that it edifies the
improvement of financial sustainability of the contemporary public sector
organisations. The drivers for the development and improvement of financial
governance in the contemporary public sector organisations are linked to the
increasingly competitive demands for different public services. The effective delivery
of such public services implies how the public financial resources are managed and
governed is critical.

Financial governance, therefore, facilitates the evaluation and control of the process
for the utilisation of public financial resources to ensure that all the desired strategic
objectives and goals of a government department are achieved. To influence the
extent to which the public financial management can aid the achievement of the
desired outcomes, Baret, Hida, Hatfield and Sandford (2013:6) suggest that the
adopted model for financial governance is an imperative. Baret et al (2013:6) model
for financial governance outlines critical mechanisms, responsibilities and structures
that facilitate the integration of financial governance in the decision making
processes and across different structures of the public sector organisations. It
outlines four critical components that influence the effectiveness of financial
governance.

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The four critical components include structure, oversight responsibilities, talent and
culture, and infrastructure. The structure outlines the financial governance pillars,
systems, reporting chains, sub-committees, controls, support functions and the
interdependencies between the respective areas. It is within the structures that
financial decisions are made and therefore it is the independencies among the
structures that influence the effectiveness of checks and balances and control of
financial decisions and utilisation of the available financial resources. This implies
that the development of such structures must be accompanied by the development
of the associated responsibilities. Quite often, the establishment of the board of
governance will have been considered under the construct of structures.

During the development of roles and responsibilities, tasks and duties are allocated
among the structures to enhance the improvement accountability. This is attributable
to the fact that the clarity of roles and responsibilities enhance the discerning of the
areas of problems in case wrong financial decisions are made or abnormalities
occur. Whereas talent and culture involve the development of a culture that
facilitates effectiveness of financial governance, optimisation and sustainability,
infrastructure refer to the investment in the relevant technologies such as accounting
and financial information systems to improve the effectiveness of monitoring and
evaluation of the process of the utilisation of public finances. In other words, Baret et
al’s (2013:6) model for financial governance enhances the improvement of financial
accountability and efficiency of the implementation of different government
programmes. Besides financial governance, financial leadership is one of the critical
constructs that influence the extent to which a government department is able to
achieve financial sustainability.

2.3.3.3 Financial Leadership

Financial leadership refers to the process of setting critical financial goals and
objectives and developing strategies that a government department can utilize to
ensure that such financial goals and objectives are achieved. It influences the outline
of the direction that the processes that must be undertaken for the accomplishment
of different activities to influence the achievement of the desired strategic objectives
and goals (Bouchal& McCrae, 2014:5). Financial leadership enhances financial
planning and the mobilisation of relevant resources which are investment in selected

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catalysing key economic activities to spur improvement of the earning potentials of a
government department.

Financial leadership not only influences effectiveness of financial planning to achieve

the desired long-term goals and objectives but also the development of goal
practices and behaviours on how the existing financial resources can be utilised in
the way that facilitates improved level of resource optimisation (Turley &Semple,
2013). This influences the development of a practice where the government is not
only concerned with how to economize the existing funds, but also how to generate
additional revenue for the government department. Although all these may spur
improvement of the financial sustainability of the government department, some
authors still argue that the extent to which leadership may influence improvement of
a government department’s still depends on certain critical prerequisites such as
long-term planning and commitment, leadership, investment of sufficient time and
money, the development effective development plan, establishment of effective
management team and use of teamwork as vehicles for the achievement of the
desired strategic objectives and goals.

Long-term planning and commitment are prerequisites in the quest for improving the
financial sustainability of a government department. This is because, the quest to
attain financial sustainability is not an overnight endeavour, but an activity requiring
continuous long-term planning and commitment (Turley &Semple, 2013).
Unfortunately, the failure of most of the government departments to achieve the
desired state of financial sustainability is linked to lack of long-term planning and
leadership commitment. In most cases, leaders get distracted on the basis that when
new events emerge, there is often a shift of focus from the old plan to the new plan.
Initiatives that influence improvement of a government department’s financial
sustainability require resilience of the leadership.

Such leadership resilience would require leaders to remain focused in the midst of all
turbulence whilst also remaining adaptive to the emerging uncertainties and
instabilities. In other words, long-term planning and commitment influences the
extent to which even in periods of uncertainties, executives are able to undertake the
necessary changes of their long-term plans to achieve the desired sustainability
objectives and goals (Schoeman, 2011). Even if leaders are not distracted by the

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emergence of uncertainties, discontinuities often still emerge from the changes of the
political systems. This is attributable to the fact that in most key municipalities, key
managers and leaders are often integrated with the ruling political system.

The implications are latent in the fact that if the government changes from one
political system to other, such key managers and leaders are also often changed.
This affects continuity and the extent to which the long-term plans that are put in
place are able to influence the achievement of the desired financial sustainability
improvement objectives. Frequent changes in governments that cause change of
public sector managers are also often exacerbated by internal policies of most
government departments that tend to only maintain a certain period of contracts
(Schoeman, 2011). Nevertheless, as contracts change and new managers are
brought in, it also tends to affect the continuity of the long-term programmes that are
implemented to achieve the desired financial sustainability goals and objectives. For
the financial leadership to influence improvement of the financial sustainability of a
government department, it may also require careful planning and investment
decisions to ensure that the conceptualisation and implementation of different
projects influence the achievement of the desired strategic objectives and goals.
Such careful planning may require the development and utilisation of appropriate
financial budgets allocating all the resources required for the implementation of all
the activities critical for translating all the strategies into tangible business results.

The effectiveness of the budget put in place is not only determined by the extent to
which it allocates the required financial resources, but also the outline and division of
responsibilities between all the key stakeholders. As the implementation of the
budget commences, the budgetary plan must prescribe how the activities will be
evaluated and monitored to ensure that it influences the achievement of the desired
outcomes (Swilling, 2005:144). In other words, as leaders develop and implement an
effective financial plan, part of the strategic initiatives of ensuring that a government
department achieves the desired strategic outcomes may also require the
development and establishment of more effective work teams and management
teams. These teams influence information exchange and sharing during the
implementation of different strategies to improve the extent to which the meagre
financial resources can be effectively optimised to implement as an array of different
government programmes as possible.

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However, some theories highlight that financial sustainability leadership is not
spontaneous, but competencies that are developed over time. Such a process often
requires the application of nine main steps encompassing recognition of the values
of financial sustainability, building networks, linking policy and delivery, sharing the
learning and new information, creating a learning culture, running demonstration
projects, public engagement, integrating sustainability concept into all the key
management processes and innovation (Swilling, 2005:144). Recognition of values
of financial sustainability influences the extent to which the public sector managers
are able to motivate a case for the development and investment in the initiatives that
leverage the financial sustainability of a government department.

Once, everyone in the organisation has bought into the idea that the improvement of
financial sustainability is a pre-requisite for improving effective performance of a
government department, it may become easier for the executives to involve and
engage employees at all levels of the organisation to get involved in the
accomplishment of initiatives that influence improvement of a government
department’s financial sustainability. This improves the extent to which the leaders
are able to, horizontally and vertically, involve managers and employees at all levels
of the organisation to minimize and reduce costs to improve the overall financial
sustainability of the government department. Improved horizontal and lateral
networks across the organisation also influence the ability of the executives to link
policy with delivery and share information on how the performance of the
government department can be undertaken in a manner that influences its financial
sustainability.

However, some authors argue that as the culture and the spirit to improve financial
sustainability becomes catalysed throughout the organisation, executives must
create conditions and environments through which such a culture of learning and
experimentation is encouraged. This is attributable to the fact that improvement of
financial sustainability involves trial and error as well as demonstration of developed
ideas that are further refined to leverage the extent to which they are successfully
implemented to catalyse the performance of a government department as well as its
financial sustainability. This implies that financial sustainability is not a once-off
event, but a process that requires constant innovations and trials of new methods to

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discern how the advantages that leverage the financial sustainability of a
government department can be induced.

2.4 PARADOXES OF FINANCIAL SUSTAINABILITY IN THE CONTEMPORARY

PUBLIC SECTOR ORGANISATIONS
Theories imply that the major paradoxes of financial sustainability in the
contemporary public sector organisations are often associated with poor analysis
and identification of the level of financial sustainability maturity, lack of suitable
government financing models, poor strategic financial planning and budgeting and
lack of effective models for managing equity. The details of these paradoxes are
evaluated below.

2.4.1 Poor Analysis and Identification of the level of Financial Sustainability

Maturity
Poor analysis and identification of the level of financial sustainability maturity tend to
affect the identification of the exact level of maturity of a government department’s
financial sustainability. This also affects the extent to which the executives are able
to identify suitable improvement measures that can be undertaken to leverage the
financial sustainability of that particular government department. The overall essence
for the assessment and identification of the maturity level of a government
department’s financial sustainability is accentuated in Birney, Clarkson and
Tuxworth’s (2010) “Spectrum of Public Sector Leadership on Sustainable
Development”. Birney, Clarkson and Tuxworth’s (2010) spectrum of public sector
leadership on sustainable development argue that the maturity of the financial
sustainability leadership of a government department is best measured by the

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assessment of five main levels encompassing risk, compliance, increment, strategy
and systems.

2.4.1.1 At Risk
This is a level at which there is systematic formal framework put in place to influence
the development of a financially sustainable government department. It is the
weakest point of the stage of developing a financially sustainable government
department (Beeton, 2011). At risk stage is often characterised by limited concerns
of the leaders about the essence for the development and improvement of financial
sustainability. Instead, most leaders of a government department which is at the at-
risk stage often tend to focus on planning and budgeting that does not integrate
investment to stimulate alternative sources of revenues. Without considering
investments that stimulate the development of alternative sources of revenues, it is
often not easier to attain financial sustainability (Beeton, 2011). This is because
financial sustainability is more associated with the extent to which a government
department has an array of different sources of financial resources that the
department can effectively use to meet the present obligations as well as future
obligations without borrowing from other sources. Since at this level, financial
sustainability is not widely considered by the managers, quite often, it is also evident
that it does not feature in most plans and policies of the government department.
However, the stage of at-risk level is significantly different from the other stages such
as the compliance level.

2.4.1.2 Compliance
The compliance level is often the beginning of the executives to recognise values
and importance of developing a financially sustainable public sector organisation. In
effect, as compared to the first stage, the notion of financial sustainability gets
mentioned and integrated quite frequently in the plans, policies and the strategies of
the departments. Even in the budgeting processes, financial sustainability issues
may emerge from the deliberations of the executive (Etherington, 2015). However,
conceptualisation and development of the strategies that would spur the
improvement of financial sustainability is often not widely appreciated. The
implications are latent in the fact that as much as financial sustainability is a
cherished state, there is often limited practical development and implementation of
programmes that spur improvement of financial sustainability. However, as further

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improvement measures are undertaken, they tend to spur the approach that a
government department uses for the development of its financial sustainability to
evolve to the incremental stage.

2.4.1.3 Incremental
At the incremental level, there is stronger recognition of the importance of financial
sustainability. In effect, the executives in that particular government department may
tend to be innovative by conducting frequent analysis to identify improvement
initiatives that can be undertaken to bolster the financial sustainability of a
government department. That process and concept of financial sustainability is
strongly integrated in the objectives and goals of the organisation. This is also
accompanied by the development of strategies in terms of projects that can be
implemented to bolster not only the capabilities of the government department to
spend the required financial resources, but also to gain revenue from the
successfully implemented projects. Since, at such a level, the government is strongly
concerned and engaged in the drive to improve its financial sustainability, it may also
invest in the training and development of the existing skills as well as constant
monitoring and evaluations to ensure that the government department becomes
financially sustainable. It is further implementation of continuous improvement that
bolsters the capabilities of the government department to adopt more strategic
improvement measures to bolster its financial sustainability.

2.4.1.4 Strategic
At the strategic level, the notion of financial sustainability is deeply entrenched
through the different levels of government with the effect that all politicians and top
government officials frequently include it in their campaign manifestos. As financial
sustainability is strongly emphasised in strategic plans, integrated development
plans and campaign manifestos, the government also continuously campaign and
advocate for resource optimisation and implementation of projects that bolster
increment in the sources of revenues. Some of the strategies may involve hiring
process improvement consultants to conduct relevant analysis and improve the
operational processes using methodologies such as sigma analysis, benchmarking,
process evaluation and re-engineering and service quality analysis and
improvement.

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The application of these techniques leverages efficiency improvement that, in turn,
catalyses cost minimisation and resource optimisation. At the same time, it is often at
the strategic level that innovation thinking and creativity are strongly emphasised as
critical predictors for enhancing development of different projects and effective
implementation of different projects that would catalyse the generation of enormous
sources of revenues and improvement of the financial sustainability of a government
department. Such innovative measures are often accompanied by the development
and use of the appropriate performance measurement frameworks in conjunction
with constant monitoring and evaluation to ensure that the implementation of
different financial sustainability improvement projects influence the achievement of
the desired strategic objectives and goals. The successful implementation of these
initiatives often spurs the development of a government department’s approach for
enhancing financial sustainability to evolve to the next step.

2.4.1.5 Systematic
At the systematic level, the concerns for improving financial sustainability often get
entrenched as part of the organisational culture. Since the drive to improve financial
sustainability is part of the organisational culture, there is often stronger drive of the
executives to integrate sustainability as part of the critical goals that the government
department strives to achieve. The integration of sustainability as part of critical
goals that must be achieved is often accompanied by a stronger long-term
commitment of the executives to ensure that relevant resources are allocated
towards the implementation of the strategic plans and projects that influence
improvement of financial sustainability of a government department. However,
constant changes of governments in a fully developed democratic society often
cause changes that render it difficult for a well-developed systematic system to sink
unless all new governments also strongly recognise financial sustainability as a
critical pre-requisite for effective performance of a government department.

If it is not financial sustainability leadership immaturity which is a major paradox of

developing a financially sustainable government, the challenges of developing a
financially sustainable local municipality may arise from the inability of executives to
use an appropriate model to develop an array of sources of funds (Padilla,
Staplefoote & Morganti,2012:9).

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2.4.2 Lack of Suitable Government Financing Models
The development of appropriate financing models minimizes risks of over-reliance on
only some sources of finances by executives in the public sector. Significant reliance
by executives only on some sources of finance limits the generation of sufficient
funds to effectively finance some of the mega projects that most governments often
develop (CIPFA-Chartered Institute of Public Finance and Accountancy, 2010:5).
Apart from investment in projects that generate revenue for the government
institution, some of the sources of finances may include government grants,
donations and funding from non-governmental institutions or direct credit finance
offered by the commercial financial institutions. Grants from the central government
are more reliable for the reason that it is constantly integrated in the national fiscal
planning and budgeting. However, a challenge often arise from the fact that in the
event of economic recession, the economic base of the central government may be
affected to affect the amount of taxes that can be generated to finance grants
provided by the central government to different institutions. This implies that in such
cases, grants to other government institutions are significantly reduced or cut-off
completely (Ellsworth, 1998). It is the risks associated with the emergence of such
circumstances that render reliance on government grants unreliable as the sources
of funds that influence a government department’s financial sustainability.

To avoid such risks, use of the internal sources of funding by way of grants from the
central government may be accompanied by the development of external sources of
funding from the non-governmental organisations. Unfortunately, it is often not easy
for largely poor government institutions to initiate productive projects or to develop
competencies that render it possible for them to lobby funding from the external
funders such as IMF or UNDP. The acquisition of external funding requires
executives in different government departments to liaise and partner with critical
external financers. In this process, executives are expected to provide project
proposals and plans that convince and motivate external funders on the viability of
the project.

Quite often, it is the challenge of lack of skills that may affect not only the
development of convincing project proposals, but also liaison and interpersonal
relationship with relevant parties to build relationships that render it possible for the
motivation of funding. Such an approach to improving the sources of funding may be

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accompanied by fundraising in which the executives tend to approach the
communities and the business communities for fundraising (Commonwealth of
Australia, 2008). Fundraising may involve development functions through which the
relevant stakeholders are invited to pledge and contribute to fundraising activities.
However, in developing countries where the majority of the population is largely
poor, fundraising is often not successfully undertaken because the population cannot
raise the required funds. In other words, each of the sources of funds in
contemporary public sector organisations is associated with significant drawbacks to
the extent that reliance on only a few sources affects the generation of sufficient
funds and financial sustainability of the entire government department.

Funds offered by donors may require well-functioning accountability frameworks to

ensure that accountability and reporting of how the funds were used to the donors.
Otherwise, failure to impressively account and report to the donors may affect the
extent to which they are able to consider the decisions to award more funds to that
particular organisation in the future (Commonwealth of Australia, 2008).
Nonetheless, if the government department or institution is not soliciting funds from
the central government or by investing in revenue-generating projects, other sources
of revenue would entail luring and motivating the investors to invest in the
geographical areas of interests. This implies that public sector executives will have to
invest in activities that improve the overall attractiveness of their jurisdictions. It may
also require the establishment of relevant legislation and policies that influence ease
of investments in a particular geographical location. This can be applied by the
development zones that businesses are encouraged to establish and invest in
exchange for reduction of taxes or other costs (Carol, Muir & Zahirul, 2014:46). To
improve the overall attractiveness of the region, it is critical to identify any of the
attractions of the area that can be used as points for its branding as an attractive
investment location.

Effective accomplishment of that will require the development of an appropriate

marketing plan and promotion to encourage potential investors. Some of the
mediums that may be used for promoting and disseminating good information about
the selected geographical region may include websites as TV, radio, newspaper and
magazine advertisements undertaken in conjunction with more aggressive social
media marketing and promotion. Such an approach would certainly create an array

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of the sources of funds paid as taxes for the government institution to use in the
financing of other economic projects that may have direct effects on improving its
financial sustainability (Cottarelli, 2009).

2.4.3 Poor Strategic Financial Planning and Budgeting

Strategic financial planning and budgeting is a challenge that affects the
performance of most of the contemporary government departments (Caldeira, 2008).
Strategic financial planning refers to the process of conducting relevant analysis to
set the objectives and the frameworks through which the existing resources can be
effectively utilised to influence the achievement of the desired strategic objectives
and goals. Strategic financial planning often utilises five steps to ensure that an
organisation achieves its desired strategic objectives and plans. These five steps
encompass: analysis and defining of the desired objectives, identification of the
available resources and determining how such resources can be utilised to achieve
the outlined goals and objectives, analysis and evaluations to identify the variances
between the planned and the actual results (Caldeira, 2008).

The process of analysis entails the undertaking of the necessary strategic

evaluations to identify the existing challenges of the organisation. This analysis is
accompanied by the evaluation of how the existing strategic plans and policies are
facilitating the achievement of such goals and objectives. Such analysis also aids the
evaluations of how the objectives in the existing strategic financial plan can be linked
to the objectives in the respective government policies, plans and integrated
development plans (Drakenstein Municipality, 2014). For it to edify the ability of a
government department to achieve the desired strategic objectives and goals, it must
be linked to the development plan or the integrated development plan of that
government department. As such analysis aids the understanding of the existing
challenges and plans and policies that are put in place to respond to such
challenges, the second part of the strategic financial analysis and budgeting process
identifies the existing resources (Cashdan, 2015).

The identification of the existing resources is often accompanied by the analysis of

how the existing resources are adequate for financing all the plans which are critical
for addressing the identified organisational challenges. This is often undertaken by
developing and applying an appropriate budget. Budgeting is the process of

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allocating the necessary resources towards the accomplishment of activities which
are critical for effective implementation of all the activities outlined in the strategic
financial plan. It encompasses both the strategic plan for ensuring that sufficient
cash is available for financing the daily operational activities as well as for financing
long-term activities that are aimed at achieving long-term goals and objectives.
However, for a government department to become financially sustainable, the
strategic financial plan must ensure not only focus on planning how to spend the
existing financial resources, but also how to invest to generate the necessary
revenues for the government department (Cashdan, 2015). It is in the financing of
revenue-generating projects and not the expenditures on non-revenue generating
operations that government departments are able to leverage their financial
sustainability.

As funds are being utilised in the implementation of different programmes, constant

analysis and evaluation is of significant importance for ensuring that the allocated
funds are used for the purposes for which they were aimed at achieving. Such
analysis may require the evaluations of the variances between the actual results
attained and the previously planned results to assess the magnitude of the
deviations and how such deviations can be corrected to influence improvement of
the financial sustainability of a government department (Chote, 2010:19). Effective
evaluations of the effectiveness of budget utilisation may require application of a
combination of qualitative and quantitative analysis and evaluation. Qualitative
evaluations often require the application of techniques such as performance
measurement and assessment, focus group discussions, interviews, document
analysis and the analysis of the existing data. Although in most cases such
evaluations are internally undertaken, it may also require the analysis and
evaluations of the opinions of the populations and other stakeholders in the areas
where the project is being implemented.

As on the other hand, quantitative analysis may require the application of techniques
such as surveys, the analysis of the existing data, co-relational analysis, and chi-
squared analysis to discern the change that has so far taken place since the
beginning of the process for the implementation of the budget plan. Checking
requires the use of the appropriate framework for monitoring and evaluation (M&E).
Monitoring refers to an on-going systematic process of assessing the extent to which

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the process of project implementation is influencing attainment of the desired
positive outcomes. Evaluation is a periodic analysis of efficiency, impact, relevance
and sustainability of the effectiveness of project implementation (Adato, 2011:11;
Dudin, Frolova, Gryzunova & Shuvalova, 2015:244; Maletic, Maletic & Gomiscek,
2012:35; Preble & Hoffman, 2012:26). The effectiveness of the M&E framework is
predicted by the clarity of the outlined quantitative and qualitative indicators,
selection of appropriate interface of quantitative and qualitative M&E methods,
application of appropriate quantitative and qualitative techniques for data analysis
and interpretation and identification of inhibitors and intervention strategies that can
be undertaken to influence improvement of the organisational performance
(Garbarino & Holland, 2009:7).

Depending on the targets and baselines outlined in the continuous improvement

plan, indicators are the symbols that must be clearly outlined to highlight criteria for
the assessment of the effectiveness of the process for the implementation of the
continuous improvement measures (Preble& Hoffman 2012:26). Indicators can be
input, process, output, and outcome and impact indicators. Input indicators facilitate
evaluation of the level of optimisation of financial and non-financial resources used in
the implementation of continuous improvement strategies (Adato, 2011:11; Dudin,
Frolova, Gryzunova & Shuvalova, 2015:244). Process indicators measure efficiency
and effectiveness of programme implementation, as output indicators assess the
results of the effects of programme vis-à-vis the amount of resources used. Outcome
indicators evaluate the short-term effects of a programme on the improvement of the
condition and standards of living of the population. Impact indicators, on the other
hand, focus on the evaluation of the long-term effects of a programme (Adato,
2011:11; Dudin, Frolova, Gryzunova & Shuvalova, 2015:244).

The clear outline of indicators is followed by the actual quantitative M&E process of
monitoring and evaluation using techniques such as surveys, KAP (Knowledge,
Attitude and Practices) survey, case study and analysis of existing statistics.
Qualitative M&E techniques encompass the use of interviews, focus group
discussions, rapid appraisals, performance management, benchmarking, letters,
citizens’ report cards and telephone hotlines. After relevant data has been collected,
quantitative analysis is often undertaken using parametric (t-test, analysis of
variance (ANOVA), multivariate analysis, correlation analysis and regressive

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analysis) and non-parametric tests (sign-test and chi-squared ( ) analysis) (Maletic,
Maletic & Gomiscek, 2012:35; Preble & Hoffman, 2012:26). In other words, strategic
financial planning and budgeting is a pillar for improving the extent to which the
government is able to effectively invest in relevant activities and projects to leverage
their overall financial sustainability (Oftelie & Sabety, 2013:19).

2.4.4 Lack of Effective Models for Managing Equity

Managing and improving the equity of the contemporary public sector organisations
is a pre-requisite for leveraging their sustainability (Izza, 2012). The organisation’s
equity refers to its net assets or residual amount as subtracted from its assets. Quite
often, this is accomplished by analysing the balanced sheet of the government
department by assessing is statement of assets, liabilities and capital at a particular
point in time. This analysis may be undertaken in conjunction with the evaluation of
the details of the balance of income and expenditure over the preceding period.
Since equity is derived from the operating income, equity is usually equal to the total
net operating results which are the balance of surpluses and deficits unfolding since
the organisation’s establishment. This equity may be held in liquid assets such as
cash or non-liquid assets such as property.

Equity balances of a government institution determine its financial health on the

basis that if the equity is held in terms of non-cash liquid forms, they can be used to
free up funds by refinancing an existing property or obtaining a mortgage on property
that was previously debt free. Alternatively, if they are held in unrestricted liquid
forms, they can be used to finance working capital needs associated with growth in
services or to replace temporarily lost revenues during a deficit period. In other
words, the analysis of equity balances influences the assessment of the extent to
which a government department can play around with its existing funds to generate
new incomes. However, due to lack of attractive investments in most of the
municipalities, it is often a challenge for the municipalities to accumulate the desired
amount of capital finance through tax revenues. This also affects the amount of
funds that municipalities are able to invest in the acquisition or purchase of different
immovable properties (Hassan, 2008).

In the end, a government institution may not have sufficient liquid cash just in the
same way that it may not have adequate finance locked up in property. To improve

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the revenue generating potential of such municipalities, it is critical to consider
developing the foundations that would leverage its revenue generating potentials.
This would require analysis and identification of the economic sectors such as
manufacturing, agriculture and tourism which are commanding heights of the
economy of that municipality to make foundational investments that also
subsequently catalyse the performance of other municipalities. Unfortunately, it has
often emerged that instead of considering investments in new areas, most
municipalities often prefer to rely on the government grants and donations or grants
from non-governmental organisations. In other words, this arises from the largely
entrenched mind-sets and cultures in which the municipalities are perceived as mere
vehicles for delivering basic services like water, electricity and housing rather
initiation of disruptive innovative projects that change and turn around the entire
performance of the municipality.

The investment of income generating projects leverages the improvement of the

diversification of the sources of income for the government institution. This
subsequently bolsters financial sustainability of the municipality on the basis that the
risks of reliance on only a few sources of income are reduced. However,
diversification of the sources of income may not only arise from investment in
different income generating projects, but also by undertaking innovative measures
that reduce the overall operational and administrative costs. This is because if the
government department is able to generate revenue from different projects,
aggressive cost reduction creates enormous opportunities that render it possible for
the executives in that government department to save enormous costs that are,
instead, used as sources of revenues to be invested in new areas. Such a view
seems to echo the opinions in the Association of Chartered Certified Accountants’
(2010) study on public sector financial management in developing countries and
emerging economies.

It was argued in that study that the improvement of the equity of the contemporary
government institutions would require investment in activities that reduce skills deficit
and retention issues in the public sector. This is attributable to the fact that skills
deficit causes work overload on the available staff to undermine the overall effective
performance and creativity of the existing staff to develop innovative ways that not
only reduce waste but also create new innovative income-generating projects. The

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Association of Chartered Certified Accountants’ (2010) study also suggests for the
improvement good governance, ethical leadership and continuous improvement
create more sources of revenues for a government department. It is through such an
approach that a government department or institution can be able to leverage its
overall equity.

In other words, theories imply that the major paradoxes of financial sustainability in
the contemporary public sector organisations are often associated with poor analysis
and identification of the level of financial sustainability maturity, lack of suitable
government financing models, poor strategic financial planning and budgeting and
lack of effective models for managing equity. In order to address these paradoxes,
different theories that have emerged from different prior studies to offer different
solutions are elucidated below.

2.5 MEASURING AND IMPROVING FINANCIAL SUSTAINABILITY OF PUBLIC

SECTOR ORGANISATIONS
Review of literature and theories imply that the effectiveness of the process for
measuring and improving financial sustainability of public sector organisations is
often predicted by the application of methodologies that enhance effective financial
sustainability measurement and reporting, outline and identification of indicators for
measuring financial sustainability and effective use of integrated sustainability
reporting. All these influence effective strategic change management for fiscal
sustainability which, in turn, edify long-term management and improvement of
financial sustainability. The details of these factors are elucidated below.

2.5.1 Financial Sustainability Measurement and Reporting

Financial sustainability reporting is one of the most critical strategies and
methodologies for measuring the effectiveness of strategies adopted for enhancing
financial sustainability in contemporary South African public sector organisations.
Influences constant analysis and reporting on the progress achieved as well as the
failure encountered. This renders it possible for the executives to identify areas of
deviations and develop the appropriate remedial measures that can be applied to
deal with such scenarios (Carol, Muir & Zahirul, 2014:46; Oftelie & Sabety, 2013:19).
However, sustainability reporting is often not widely emphasised in most
contemporary public sector organisations. Such circumstances affect the extent to

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which financial measurement and reporting can be used as the source of information
on the challenges that must be addressed to improve the overall financial
sustainability of a government department. Financial sustainability measurement and
reporting not only focus on the assessment of the extent to which the desired
outcomes will be achieved, but also on other areas such as cost minimisation,
efficiency improvement and quality of customer services. This is attributable to the
fact that in the event of cost effective and efficient measures being used, it tends to
contribute enormously to improved cost savings.

Improved cost savings leave the government department with financial resources
that can be invested in the other income generating projects. To influence improved
performance measurement as a prerequisite for enhancing financial sustainability,
most contemporary governments have adopted techniques such as management-
by-objectives, benchmarking, performance appraisal and Kaplan and Norton’s
(1992) balanced scorecard. Management-by-objectives refers to methodology that
focuses on the evaluation and analysis of the extent to which the defined financial
sustainability objectives of a government department are most likely to be achieved.
It uses the defined objectives to engage the employees to be constantly vigilant to
identify and correct the emerging deviations. Management-by-objectives enhances
the measurement of the level of variance between the results achieved and the
planned results. Subsequently, if the gap is so wide, most of the senior managers
and executives are often motivated to intervene before the deviations become acute
and costly to correct.

On the other hand, benchmarking influences constant comparisons and analysis of

the performance of a particular selected government department against any of the
selected best performing government department. For benchmarking to be
effectively undertaken, it may require the selection of the financial performance
metrics against which the performance a government department will be based.
Such metrics are often defined in areas encompassing cost savings, efficiency,
quality management and the indicators on the investment of the required revenue
generating projects.

The highlight of these critical areas for benchmarking may be followed by analysis
and identification of the partners with whom the government department can

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benchmark itself. This influences the learning and adoption of the best financial
sustainability practices in the partner organisations to leverage the overall
improvement of a government department’s financial sustainability. The application
of benchmarking and management-by-objectives may have to be accompanied by
the use of performance appraisal techniques to improve the financial sustainability
and performance of a government department. Performance appraisal often focuses
on the evaluation and improvement of employee behaviours and practices. It
motivates the employees to get committed to ensure that all the activities for
enhancing financial sustainability are effectively accomplished.

Performance appraisal may be accompanied by the application of Kaplan and

Norton’s (1992) balanced scorecard and strategy map to ensure that the process for
the implementation of all financial sustainability enhancing strategies are contributing
towards the achievement of the desired outcomes. However, effective development
and application of these methodologies is often constrained by poor accountability
and lack of transparency to ensure that all the challenges are reported for the
executives to discern the improvement strategies and measures that can be
suggested. To ensure effective financial sustainability reporting across all public
sector organisations, most of the authors argue that it is critical that public sector
managers adhere to the critical principles of financial sustainability that include the
development of an inclusive network of all the stakeholders to ensure that public
interest drives every strategic decision, emphasis of transparency as a catalyst for
change, adoptions of standards that inspire informed decision making and constant
change and evolution to enhance adaptability.

Even if the application of such techniques influence improvement of financial

sustainability of a government department, it is often still critical that public sector
managers adopt effective triple bottom-line framework. The application of a triple
bottom-line business model not only influences evaluation and reporting on financial
performance, but also performance of the employees and technologies used to
ensure that a government department performs more effectively. In other words,
even if a budgeting plan is used as a guide for the implementation of activities that
influence improvement of financial sustainability, it is still often critical that an
appropriate framework is adopted for measuring and reporting on the progress and
challenges experienced in the initiatives of improving the financial sustainability of a

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government department. However, such analysis may not be a success unless
accompanied by clearly defined indicators that can be used for measuring financial
sustainability.

2.5.2 Indicators for Measuring Financial Sustainability

Indicators are symbols that highlight whether a government department has put all
measures in place to influence the achievement of financial sustainability objectives
(World Bank, 2010). It is through this analysis that the executives in different
government departments are able to evaluate and understand the progress and
hindrances undermining the drive to attain financial sustainability. Quite often,
indicators are set to examine the effectiveness of strategic planning, income
generating capabilities, financial administration capabilities, diversification and
funding sources, internal financial reporting and external oversight audits.

Indicators on the effectiveness of the financial strategic plan explores whether a

government department has an effective strategic financial plan in place (World
Bank, 2010). It also examines whether such strategic financial plans are frequently
evaluated and adjusted to respond to the emerging trends. Such analysis entails the
analysis of the flexibility of the strategic financial plan of the government department
to make necessary adjustments and accommodate changes that must also be
financed to influence the achievement of the desired sustainability objectives. The
analysis of the flexibility of the adopted strategic financial plan must also be
accompanied by the analysis of the extent to which such strategic financial plans are
linked to the other government policies and integrated development plans
emphasising the need to improve the sustainability of a government department. On
the other hand, the indicators of income-generating activities would explore the
extent to which a government department has invested in an array of revenue
generating activities. It examines the extent to which not only investments are
undertaken on critical specific revenue generating projects, but also how the
executives in the government department has been able to network and develop a
network of critical donors that are prepared to support an array of different revenue
generating projects (The Association of Chartered Certified Accountants, 2010).
Such analysis often entails the evaluation of the extent to which the sources of
government revenues are diversified so that in case, there is a shortage of revenue
generation from one source, the revenues from the other sources can be engaged.

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That is what financial sustainability refers to. However, for the obtained revenue to
be effectively utilised in the critical catalysing activities that spawn improvement of
the financial sustainability of a government, indicators also often explore how such
funds are administered by relevant government financial authorities.

The evaluation of the effectiveness of financial administration and governance

requires the evaluation of whether leaders and the administrators in that department
adhere to the principles of good governance that often include transparency,
accountability, integrity and responsibility (The Association of Chartered Certified
Accountants, 2010). The effectiveness of financial administration of a government
department is also measured by the extent to which the authorities to adhere to the
relevant principles of good ethical leadership. Principles of good ethical leadership
require financial leaders to be constantly responsible and act in the best interests of
the departments that they serve. Quite often, financial administrators in different
government departments are also expected to adhere to the principles of good
financial practice in the King 111 of Good Corporate Governance. To foster
effectiveness of financial administration, it is important to ensure that all these
principles are consolidated in one document and communicated to the employees
(Matthews & Shulman, 2005:232). Clear communication of such principles influences
the extent to which the employees involved in financial administration are able to
understand what is expected of them as they engage in the administration of the
finances of a government department.

However, even in the event of well documentation and clear communication of such
policies, entrenched culture of poor governance and ethics still often cause collision
among senior managers to engage in activities that flout such regulations and
policies. Such cultures of poor governance and ethics may also affect reporting and
evaluations to ensure that the process for the implementation of different
government programmes are contributing enormously towards the improvement of
the financial sustainability of a government department (Matthews & Shulman
2005:232).

Frequent financial reporting weekly, monthly or quarterly is critical for the executives
to gain insight into how different activities are being implemented to spur attainment
of financial sustainability. Financial reporting is based on the four pillars of financial

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sustainability that hold that the achievement of financial sustainability is a long-term
goal, and an on-going process of which no activity alone is capable of influencing
financial sustainability, but a combination of coherently linked activities. It is also the
adage in the four pillars of financial sustainability that the achievement of
sustainability is an obligation and a strong requirement that requires stronger
commitment from the executives.

To ensure that all the funds are being used effectively on the sets of activities that
influence attainment of financial sustainability, internal and external auditors may
also be engaged to assess whether funds are being used for the right purposes.
These oversight roles are also sometimes performed by some external bodies and
institutions such as the parliament’s public accounts committee, opposition political
parties, media and non-governmental organisations (Lovanxay, 2009). In other
words, these indicators of finance sustainability offer a quick snapshot of the state of
funds’ utilisation to assess whether all the financial sustainability objectives are being
achieved. As much as the roles performed by different audit committees may be
effective, it is still often critical to develop and apply an appropriate integrated
sustainability reporting framework.

2.5.3 Integrated Sustainability Reporting

Integrated sustainability reporting encourages the analysis of the extent to which the
desired outcomes have been achieved across all dimensions (Slabbert, 2014). Such
dimensions may include the financials, behaviours, governance, ethics and
accountability. It explores not only the extent to which the desired financial outcomes
have been attained, but also the extent to which management and employee
behaviours have changed and transformed to support the effective implementation of
the activities that influence improvement of the financial sustainability of a
government department (Slabbert, 2014). Such behavioural change analysis may
also entail the evaluation of the extent to which such behavioural change have been
supportive of the initiatives that enhance good governance and ethics.

This is attributable to the view that adherence to the principles of good governance
and ethics influence improvement of the analysis of not only the amount of financial
resources that have been generated, but also the evaluation of how such funds is
being spent. In addition to exploring the extent to which the internally accomplished

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activities support achievement of financial sustainability, integrated sustainability
reporting also examines the extent to which supportive activities such as
procurement and other partner organisations such as construction contractors are
effectively accomplishing all the required activities in a way that minimise wastes to
catalyse the improvement of the financial sustainability of a government department.

In other words, the application integrated sustainability reporting framework provokes

the executives in the public sector evaluate and rethink how resources are utilised to
create values across six main areas encompassing finance, manufacturing, social
relationship, natural, intellectual and human dimensions. The rationale for the
application of integrated financial sustainability reporting is attributable to the
challenges and paradoxes that often bedevil effective management and
accountability of finances in the public sector (Mabugu & Monkam, 2013).

Apart from the complexities arising from the multitudes of stakeholders such as
contractors, users of services, tax payers and parliament that the government
department has got to respond to, it is also often a challenge to offer numerous
service aimed delivering numerous and yet conflict economic, social, political and
environmental outcomes and benefits (Lohri, Camenzind & Zurbrugg, 2014:542).
This affects the extent to which a government department is able to balance
resource allocations in terms of the prioritisation of critical activities that finance to
catalyse the achievement of the desired outcomes.

The complexities of having to achieve these competing outcomes almost at the

same time are often further affected by the challenge of having to strive to achieve
long-term goals whilst also striving to achieve short term objectives. To address
these paradoxes and complexities of integrated sustainability reporting, the Global
Reporting Initiatives-GR1’s (2010) framework for integrated sustainability reporting
argues that to influence the holistic improvement of the capabilities of a government
department to achieve its sustainability outcomes, financial executives will not only
need to report their financials, but also the social, environmental and economic
context within which it operates.

GR1’s (2010) framework for integrated sustainability reporting tows a different logic
from the traditional reporting practice in which discrete reports where prepared for
each of the areas such as financial performance, governance, remuneration,

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sustainability performance and management commentary. However, in contrast to
such approach, the approach in the GR1’s (2010) framework for integrated
sustainability reporting focuses on analysing the linkage between financial and non-
financial information and the linkage between past, current and future performance.

2.5.4 Strategic Change Management for Fiscal Sustainability

Design and application of the appropriate strategic is critical for undertaking the
necessary changes and improvement measures that bolster a government
department’s financial sustainability (Sarvi, 2011). It may require the setting of vision
for fiscal sustainability by undertaking investments in innovative projects and
reduction of wastes. This may require change and transformation of how the
activities in the contemporary public sector organisations are accomplished. Such
changes may require the change of management approach in which the focus of
executives and managers in the public sector must be shifted away from mere
deliberations on how the available funds must be spent to the analysis of the
innovative catalysing projects that the government needs to invest in (Lohri et al.,
2014:542).

To ensure that the fiscal resources allocated for the implementation of different
projects influence the achievement of such goals and objectives, effective
management of such change and transformation may require the evaluation of how
change from largely unethical management behaviours can be changed and
transformed into a more ethical one. This must also be accompanied by the
development and adoption of a more appropriate governance framework to reduce
the amount of funds that often get diverted or wasted through grafts and other
unethical management behaviours.

However, in a study conducted by OECD (2010) on the approach for restoring fiscal
sustainability, it was noted that deficit reduction is a major challenge that undermine
quests of most contemporary governments to realise fiscal sustainability. This is
attributable to the fact that given the competing demands from the population for
different services in the midst of limited sources of government revenues, the quest
to achieve fiscal sustainability often gets undermined by the fact that as the
government officials strive to meet such needs, they only end up incurring more and
more debts.

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More debts incurred imply that the government may not be able to save sufficient
funds which can be used in the financing of other projects without borrowing. To
reduce the overall government deficit and influence fiscal sustainability, OECD’s
(2010) theory for restoring fiscal sustainability emphasises that governments must
develop and adopt credible plans for deficit reduction. This plan would require
change and transformation of the existing spending structures to the ones which
support cost minimization whilst also undertaking carefully selected investments to
instigate improvement of the existing sources of government revenues.

The adoption of credible deficit reduction plan may influence the turning around of
the existing performance of the economy. This is attributable to the fact that as the
government seeks to improve reliance on internally generated sources of revenues;
it may end up investing and improving the conditions of most of the critical structures
and infrastructures (Sarvi, 2011). It is such improvement in the internal investment
conditions of the country which may instigate improved investor confidence in the
country to spur improved inflow of foreign direct investments. Although incentives
have to be offered to attract and retain foreign investors in the short run, in the long
run, it often pays off through increment in the collected government revenues. Such
an approach will have to be accompanied by the crisis management culture in which
the government concentrates on analysing, identifying and diffusing threats before
they occur.

The adoption of a crisis management plan would require development of the

contingent plan and funds that can be used when emergencies occur. Quite often, it
is the emergence of sudden changes that may lure a government into spending in
case the government was not prepared; it is such eventualities that often cause
governments to incur debts in order to survive. That implies a culture of constant
monitoring and evaluation as well as auditing must be encouraged among all the
employees and managers. To accomplish this, the model designed and adopted by
the UK Audit Commission (2010) requires the executives and the senior managers in
different government institutions to undertake continuous improvement initiatives that
entail application of five phases of activities encompassing taking stock, getting
started, setting the strategic direction, implementation of the required activities and
monitoring and evaluation to ensure that the changes implementation influence the
achievement of the desired financial sustainability outcomes. The application of this

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model enhances the understanding of the challenges bedevilling the effective
financial management of a government department so as to determine the
improvement measures that can be suggested.

The UK Audit Commission’s (2010) model also emphasises some of the predictors
of the implementation of change that drive improvement of a government
department’s capabilities to achieve financial sustainability to linked the clarity of
purpose and strategic directions. Clarity of purpose if supported by effective political
leadership and managerial capabilities can influence employee behaviours and
practices towards the direction required for improvement of a government
department’s financial sustainability. In other words, effective management of
strategic change is a critical inherent requirement for leveraging the financial
sustainability of a government department. As changes for improving the financial
sustainability of a government department cascades throughout the organisation,
managing such sustainability to ensure that a government department becomes
financially sustainable is one of the critical questions that the executives in the public
sector may be required to deal.

2.5.5 Managing and Improving Financial Sustainability

When all the activities, programmes and projects that leverage the financial
sustainability of a government department are put in place, it is often managing such
a state to leverage the long-term financial sustainability of a government department
which is a challenge. Managing and improving financial sustainability of a
government department therefore enhances the extent to which a government
department is able to remain sustainable for years and decades that follow. Although
long-term planning and budgeting is a prerequisite for achieving long-term financial
sustainability, Klinz (2010) argues that five elements that executives in the
government department will have to adopt to leverage long-term financial
sustainability encompass entail ensuring transparency and long-term financial
planning, sound management of data quality to improve the accuracy of the
improvement measures that are to be put in place. These must be accompanied by
the integration of implicit liabilities into the government budgets as compared to the
present approach in which lack of transparency and honesty tend to cause failure to
disclose all the liabilities and the magnitude of the indebtedness of public institution.
Such lack of honesty and transparency is often justified on the basis that it eliminates

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raising or revealing information that would affect public confidence in the economy
on the basis that if revealed, the consequences may be worse than the present
financial crisis.

Although such arguments are valid, it is important that transparency and disclosure
of all critical financial information, whether good or bad, is encouraged so that an
appropriate diagnosis is based on honest data to assess how such challenges can
be addressed. As improvement measures are being implemented, the World Bank’s
(2010) public expenditure model emphasises the need for integrated assessment of
financial performance and ensuring that public finance management improve over
time. To improve the effectiveness of public finance management, the World Bank’s
(2010) public expenditure model also emphasises constant regular, rigorous,
evidence-based monitoring and evaluations, and the development and management
of sound data and information management.

However, to influence the achievement of the desired financial sustainability results,

the World Bank’s (2010) model requires the accomplishment of ten steps
encompassing training and improvement of financial management skills and
competencies. This step must be accompanied by initiatives for ensuring that
financial sustainability is placed at the centre of strategy formulation, developing and
embedding good financial management practice across all the departments,
investment in people development and training, communicating and engaging with
relevant key stakeholders. All these must also be undertaken in conjunction with
application of the appropriate reward and recognition strategies to reward and
encourage the development of good financial management practices and
behaviours.

Good financial behaviours and practices influence improve financial sustainability

and public confidence in the government department of the day. However, some of
the authors argue that to leverage financial sustainability, it is critical for the
government adopt typical methodologies for improving financial sustainability in the
private sector. In this process, executives are expected to develop and apply
financial management systems that enable public sector organisations turn
financially resilient to withstand all forms of changes emerging from the external
business environment (Leon, 2001). Such a view is echoed in the World Bank’s

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(2010) model on financial sustainability that to build a financially resilient public
sector organisation, it is critical that the executives recognise the importance for
gathering and using high quality data in the formulation and implementation of
relevant fiscal policies and plans.

Some other requirements demand governments to shift from the cash-based to

accrual-based accounting and adherence to the principles of good financial risk
management and reporting, including the adoption of appropriate standards for
enhancing accountability and transparency of the financial decisions made by the
public sector managers and executives (Ball, 2010). Such a view is also
substantiated in the view of Hassan (2010) that the drive to leverage the long-term
confidence and financial sustainability of the contemporary public sector
organisations may require the application of two steps encompassing assessment of
the treasury’s cash flow and investment in the relevant financial management skills.

The analysis of the treasury’s cash flow may require evaluation of the flow of
revenues obtained from taxes or any other economic projects vis-à-vis the
expenditures from different government departments that the treasury has got to
respond to. This is often accompanied by the analysis of the amount of funds
acquired through borrowing that in turn induce thee need to repay such borrowed
funds. Whatever the level that the government department is operating, such
analysis aids the assessment of the overall financial health of the government. This
influences the extent to which the government department is able to get involved in
the development of innovative economic projects that can be used to fill the gaps
that may arise from a government’s over indebtedness. As such analysis is being
undertaken, it is also critical for executives to invest in the development programmes
that improve skills and competencies of the employees to read symptoms of
turbulence from the unfolding changes and undertake the necessary review and
modifications of their capabilities to thrive.

In other words, the view that these measures leverage the financial sustainability of
the local municipality is accentuated across different international cases where the
implementations of the measures that spawn financial sustainability have been
successful.

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2.6 INTERNATIONAL CASES WHERE THE IMPLEMENTATION OF
FINANCIAL SUSTAINABILITY MEASURES HAS BEEN SUCCESSFUL
The financial initiative undertaken by the City of London reflects one of the
successful cases of where the implementation of the measures for leveraging
financial sustainability has been successful. To bolster its financial sustainability, the
City of London uses debentures as one of the strategies for raising funds from the
general public (City of London, 2017). In these fundraising initiatives, the debentures
are used interchangeably with bonds to raise funds from the general public. Capital
levy and the provincial and federal grants, donations and partnership development
charges are the internal sources of revenue. The funds raised from debentures are
further supplemented by the funds raised from its revenues, property taxes and utility
rates. The collected revenues are mainly used for financing the City of London’s
operating expenditure such as the general budget which is financed by property tax,
water budget which is supported by rates’ payments and wastewater budget which is
also supported by rates’ payments.

To bolster its revenue generation, the management of the City of London has also
been engaging in the application of the measures that improvement its asset
management as well as asset optimisation. This is being undertaken by the adoption
of the appropriate asset maintenance policies. This enables its existing assets to be
maintained frequently to bolster their overall lifespan. Through this, the City of
London saves enormous costs that are associated with the purchase of new assets.
This creates additional capital reserve used for financing different infrastructure
expenditure (City of London, 2017).

However, besides the use of the appropriate governance policies, the City of London
also prioritises the importance of financial planning and budgeting as a strategy for
improving the optimisation of its existing resources. This is because the existence of
an effective financial plan and budgets enhances the analysis of the extent to which
the on-going financial expenditures are in accord with the stipulated strategic
financial plan. In that regard, the existence of appropriate financial plan and budgets
offers the guiding road through frequent evaluations of financial expenditures
undertaken. This enables interventions to ensure that deviations are corrected
before they turn grave.

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Even if the City of London collects sufficient revenue from property taxes and rates, it
has also been increasingly investing in the initiatives that bolster its overall
attractiveness as a favourable investment destination. Its overall improvement as the
attractive investment destinations lures more and more businesses to invest in
London. This creates additional sources of revenues that are generated through
investment fees and other forms of taxes and levies. To accomplish this, the City of
London has invested in the development of the appropriate infrastructures such as
telecommunication systems, roads, rails and airports. However, as such initiatives
are being undertaken, the City of London has also developed a system for managing
its efficiency and sustainability (City of London, 2017).

This is being undertaken through the City of London’s Efficiency and Sustainability
Plan. This plan seeks to leverage the overall operational efficiency of the City of
London so as to minimise wastes and create additional sources of revenues that can
be used for financing other development initiatives. The City of London’s Efficiency
and Sustainability Plan outlines five main measures that can be used for leveraging
the operational efficiency and sustainability of the City of London. These five
measures encompass financial strategy, budget policy, resource allocation,
corporate property asset management strategy, capital project evaluation,
management and monitoring, treasury management and investment strategy, risk
and performance management.

The financial strategy offers the framework enhancing effective management of the
existing resources to ensure that they are utilised to achieve the desired strategic
outcomes. Whereas the existence of the appropriate budget policy aids the
balancing of the current expenditure with the current income, resource allocation
policy enhances the analysis of how the limited financial resources can be optimised
to achieve as enormous output as possible. These contrast with the corporate asset
policy that seeks to ensure that the operational assets of the City of London are
managed efficiently and sustainably in the accomplishment of the defined policies.
Capital project evaluation, management and monitoring enhance the analysis of the
capital project life cycle to enhance the identification of the corrective and
improvement measures that can be undertaken (City of London, 2017). On the other
hand, treasury management and investment strategy deals with the planning and

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management of the City of London Corporation’s investments, cash flows, and
banking and money market transactions.

Risk and performance management deal with the process of undertaking frequent
risk analysis and identifications to enhance the determining of the intervention
measures that can be undertaken. This is attributable to the fact that risk occurrence
can cause incidents that can be costly to correct. In effective, proactive analysis and
identification of such incidents is critical for leveraging the overall financial
sustainability of the City of London. However, it is not only at the City of London
where the implementation of financial sustainability measures has been successful,
but also the initiatives undertaken by the City of Sydney.

The City of Sydney emphasises the development and use of an appropriate financial
plan as critical for leveraging financial sustainability (City of Sydney, 2016). It also
emphasizes the need for analysis and identification of the operational risks that may
arise from the increase of the costs of input, levels of service expected by the
community, new services expected to be delivered by the government and
competition for certain specific service areas. This enhances the mitigation of the
incidents that cause cost escalations to affect cost savings and the leverage of
financial sustainability. Besides material and contract management, the City of
Sydney also emphasises the importance for the management of factors such as
energy and water prices (City of Sydney, 2016).

2.7 CONCLUSION
It is increasingly emerging that financial sustainability is increasingly turning into a
pre-requisite for effective performance of the contemporary public sector
organisations. It edifies the identification and elimination of wastes and costly
ventures. All these impact positively on the level of resource optimisation.
Considering the increasing pressure to respond to endless demands for different
services, effectiveness of resource optimisation, therefore, enables public sector
executives to effectively respond to such demands. However, for financial
sustainability to leverage effective performance of a government department, it is
common across the views of several scholars that the development and
improvement of the sustainability of the contemporary public sector organisations is
predicted by the use of the strategic cyclical financial sustainability framework that

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entail environmental analysis, identification of the sources of revenues and revenue
generation, managing the utilisation of the generated revenues, and monitoring and
evaluation. The effectiveness of financial sustainability is also predicted by the
effective use of the models such as four pillars of financial sustainability, five capitals’
theory of financial sustainability, and three foundational constructs (financial risk
management, financial governance & financial leadership) of financial sustainability.

In other words, it is evident from these theories that the development of three
foundational constructs of financial sustainability that encompass financial risk
management, financial governance and financial leadership creates pillars that
influence the development of a financially stable and sustainable government
department. However, over time, it has emerged from the empirical studies that the
endeavours of most government departments to conceptualise and apply strategies
that leverage their financial sustainability has often been marred by a combination of
different paradoxes. Theories imply that the major paradoxes of financial
sustainability in the contemporary public sector organisations are often associated
with poor analysis and identification of the level of financial sustainability maturity,
lack of suitable government financing models, poor strategic financial planning and
budgeting and lack of effective models for managing equity.

In order to address these paradoxes, review of literature and theories suggests that
managers must conceptualise and apply methodologies that enhance effective
financial sustainability measurement and reporting, outline and identification of
indicators for measuring financial sustainability, and effective use of integrated
sustainability reporting. All these influence effective strategic change management
for fiscal sustainability that edify long-term management and improvement of
financial sustainability. Against this background, the discussions in the next chapter
elucidate the research design and methodologies used in the primary research
process.

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Chapter 3

FINANCIAL SUSTAINABILITY IN THE SOUTH AFRICAN LOCAL GOVERNMENT

3.1 INTRODUCTION
This chapter elucidates on the overview of the regulatory and policy frameworks that
offer the basis for sound financial management and financial sustainability in the
South African local government. In terms of the regulatory framework on financial
sustainability in the South African Local Government, the chapter explores aspects
of the provisions of the 1996 Constitution of the Republic of South Africa that
emphasise the need for sound financial management and financial sustainability in
the local municipality. Against this backdrop, the regulatory framework also
evaluated the implications of the Municipal Finance Management Act (MFMA), No.
56 of 2003 on enhancing sound financial management and financial sustainability in
the South African local government sphere. The section of policy framework on
financial sustainability in the South African Local Government examined the SALGA
funding model and fiscal framework and financial management, local government
procurement framework and its influence on financial sustainability, and the National
Development Plan and local government financial sustainability.

3.2 LEGISLATIVE FRAMEWORK: FINANCIAL SUSTAINABILITY IN THE SOUTH

AFRICAN LOCAL GOVERNMENT
The essence for the development of a financially sustainable local government is
strongly emphasised in the 1996 Constitution of the Republic of South Africa. The
1996 Constitution of the Republic of South Africa requires the executive authorities in
the local municipality to devise and adopt means of delivering services to the
population within the designated locations in a way which is within the financial and
administrative capacities of the municipalities. Whilst using limited resources and the
available capacity of the municipality, the 1996 Constitution of the Republic of South
Africa requires development programmes that would aid the development and
entrenchment of a democratic and accountable system of government and the
provision of services in the sustainable manner. The 1996 Constitution of the
Republic of South Africa also requires the Department of Local Government to
develop and implement programmes that would significantly influence improvement
of the social and economic development of the country. It is these quests to leverage

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sound financial management and financial sustainability of the local municipality that
were echoed in the Municipal Finance Management Act (MFMA), No. 56 of 2003.

3.2.1 Municipal Finance Management Act (MFMA)

Most regulatory reforms that were introduced by the government to enhance
effective financial management and sustainability of the contemporary municipalities
and local municipalities are anchored in the Municipal Finance Management Act
(MFMA), No. 56 of 2003. The motive for the introduction of MFMA was to promote
sound financial management as the source of long-term financial sustainability at the
local government level. Sound financial management refers to the extent to which
financial decisions are based and guided on sound financial management principles
of equity, honesty and transparency to ensure that the allocated financial resources
influence the achievement of the outcomes for which they were intended. It aids the
reduction of wastes and corruption that cause loss of funds aimed for financing
different projects. To achieve this, the Municipal Finance Management Act
emphasises the need for integrated planning and budgeting, revenue, cash and
expenditure management, procurement, asset management, reporting and
oversight.

Although the Municipal Finance Management Act echoed the stipulations in the 1998
White Paper that agitated for the development of municipal systems that ensure that
municipal expenditures are effectively and efficiently developmental in a way that the
municipalities can easily be held accountable, there are other legislations that also
encourages the development of a sound financial management system. These
legislations include: the Municipal Structures Act 1998, the Municipal Systems Act
2000, the Municipal Property Rates Act 2004 and the Municipal Fiscal Powers and
Functions Act 2007. To develop a sound municipal finance management system, the
Municipal Finance Management Act agitated for the change and reforms of the
municipal finance management practices, sound financial management as key to
leveraging the long-term financial sustainability of the municipalities, strengthening
oversight through improved transparency and accountability for the undertaken
financial decisions and institutional strengthening and capacity building. The details
of these key components in the Municipal Finance Management Act are evaluated
and discussed below.

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3.2.1.1 Transformation of the Municipal Finance Management
Practices
It is the fundamental argument in MFMA that if municipalities are to achieve the
desired outcomes, then change and reforms of the municipal management practices
may have to be undertaken. This is attributable to the fact that the introduction of
MFMA was aimed at dealing with a lot of previous inefficiencies and ineffectiveness
in the municipal financial management system that rendered it not reasonably
possible for most of the municipalities to become financially sustainability. These
inefficiencies and ineffectiveness in the management of municipal finances arose
from poor budgeting, reporting and accountability that certainly perpetrated
corruption, waste and loss of funds that subsequently affected the improvement of
the financial sustainability of most municipalities.

Prior to the introduction of MFMA, most municipalities used the one year line-item
budgeting that affected integrated strategic planning and linking of budgeting to key
priorities during the course of the medium term budgeting process. This limited the
effective optimisation of the existing municipal funds to invest in the existing key
priorities to generate additional sources of revenues to influence the improvement of
the financial sustainability of the municipalities (National Treasury, 2011).

In other words, prior to the introduction of MFMA, most municipalities focused on

budgeting on how to spend the existing funds rather than on how the innovative
development projects can be financed to instigate the generation of additional
sources of revenues. As this limited the generation of new sources of revenue, the
other constraints arose from the culture that strongly emphasised frequent
performance evaluation and reporting. This strong culture of performance evaluation
and reporting only influenced the emergence of a culture of compliance without
necessarily ensuring that the contents of the reports accurately reflected the
progress and strides made by different municipalities. The implications were latent in
the fact that as much as too much data was generated, only limited information
seemed useful for making the required relevant financial decisions. The negative
effects of such situations were further exacerbated by the fact that as stronger
performance evaluation and reporting were emphasised, only limited initiatives were
undertaken to ensure that all the municipalities submitted their reports to the auditor-
general. In effect, it often emerged that as some of the municipal financial reports

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were inaccurate and incomplete, others never submitted reports at all. This affected
the evaluation of the progress of different municipalities by the central government
so as to determine the intervention measures that can be undertaken.

The introduction of the MFMA was therefore aimed at introducing changes and
reforms that would enable municipalities make changes to develop mechanism that
would enable them operate within the prescribed legal frameworks and legislations.
The introduction of such legal frameworks and legislation would enable them operate
in the way that would easily enable them to be held accountable. To accomplish this,
the MFMA agitated for the development of three mechanisms that would aid
improvement of municipal accountability and financial sustainability. These three
mechanisms included separating and clarifying the roles and responsibilities of
mayors, executive councillors, non-executive councillors and municipal
administrators, development of performance orientation prescribing service delivery
priorities and plans, and strengthening reporting and disclosure to edify municipal
accountability. Separating and clarification of the roles and responsibilities of
mayors, executive councillors, non-executive councillors and municipal
administrators are critical for enhancing good governance and accountability of the
municipal system.

In this process, the executive mayor and councillors offer leadership and direction to
the municipality. This may require planning and outlining critical strategies through
which different municipal programmes can be successfully implemented to influence
achievement of the desired outcomes. Municipal executive mayors and councillors
also plan and determine how the available resources may have to be optimised to
achieve not only the outlined goals and objectives, but also to generate new sources
of revenues. That implies the ethical preponderance of the executive mayor and
councillors may tend to be critical for enhancing the extent to which the available
financial resources are used for the achievement of the benefits and advantages that
they were planned to achieve.

To achieve such advantages, the municipal executive mayor and councillors are
expected to exercise impartiality in the process of the allocation of financial
resources and outsourcing contracts through the awards of tenders. On the other
hand, municipal managers and municipal administrative teams are often charged

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with the implementation of the plans and directives issued by the municipal executive
committees and councillors. This may require the exercise of due diligence to ensure
that all programmes are successfully implemented in the way that facilitates the
achievement of the greatest good for the greatest number of the citizens residing in
the jurisdiction of that municipality (Maphalla, 2015).

As much as the separation between the political and management roles of the
personnel of municipal administration and management influences good
governance, it is still often of essence to ensure that the appropriate system for
performance monitoring and evaluation is adapted to aid evaluation and identification
and correction of deviations. This minimizes risks of resource wastage that often
arise from deviations from the prescribed plans to subsequently impact positively on
the municipality’s overall level of resource optimisation and financial sustainability.
This certainly would influence the successful implementation of different of different
municipal programmes. However, unless strategic municipal plans are aligned with
the budgeting and reporting processes, it may often tend to be difficult to achieve the
desired strategic outcomes and goals.

The essence for the alignment of the strategic plans, budgets and reporting
processes is strongly emphasised in Section 153 of the Constitution of the Republic
of South Africa as well as in the Municipal Finance Management Act and the
Municipal Systems Act. It is argued in Section 153 of the Constitution of the Republic
of South Africa as well as in the Municipal Finance Management Act and the
Municipal Systems Act that such alignment influences the assessment of the extent
to which evaluations are able to effectively be undertaken to assess whether the
process for the implementation of different municipal programmes is aiding the
achievement of the defined areas of key priorities.

Over the decades, pragmatic approaches used by the municipalities imply the
alignment of planning, budgeting and reporting processes may take a cyclical
process encompassing key financial management and accountability cycle
encompassing integrated development planning, budgeting, service delivery and
budget implementation, in-year reports and annual financial statements that are
presented to the municipal oversight committees. This information offers critical
insights that influence the new phase of planning and implementation of modified

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activities that can be undertaken to deal with the identified challenges (National
Treasury, 2010). Although these reforms introduced by the MFMA have influenced
the improvement of sound financial management and sustainability, new guidelines
introduced by the 2009 National Treasury Regulations also sought to integrate new
changes that would contribute to changing and transforming the nature of municipal
finance management and administration. To achieve this, the 2009 National
Treasury Regulations agitates for the development of standards to ensure that all
municipal financial transactions are captured as they unfold. This would enhance
effective monitoring and evaluations and interventions in case deviations are
detected.

It is emphasised in the 2009 National Treasury Regulations that such initiatives must
be accompanied by the development and establishment of the appropriate revenue
and cash management policies, processes and procedures as well as strengthening
non-financial reporting as measures for the evaluation of the extent to which the on-
going processes for the implementation of different programmes are aiding the
achievement of value for money. Even if the adoption of such measures minimizes
resource wastage to impact positively on the municipal financial sustainability, it is
still often critical to adopt enforcement mechanisms that would influence the use of
appropriate actions to deter further financial misconducts. However, as part of the
initiatives for the transformation of the municipal finance management practices, the
Municipal Finance Management Act also agitated for the strengthening of the
municipal planning and budgeting processes.

3.2.1.2 Strengthening of the Municipal Planning and Budgeting

Processes
It is strongly emphasised in the MFMA that the improvement of the financial
sustainability of the municipalities would require strengthening the municipal
planning and budgeting process. This is attributable to the fact that it is through
planning that the municipal authorities are able to discern how the existing resources
can be optimised to achieve the outlined key priorities. Municipal planning and
budgeting may not only require determining how to utilize thee available revenues,
but also how to generate new sources of revenues to influence the extent to which
the municipality is able to its present as well as future needs and demands.
According to the MFMA Circular, the effectiveness of the municipal planning and

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budgeting depends on the extent to which it is accomplished according to the cycle
processes encompassing a planning phase, preparation phase, tabling and public
consultation phase, revision and debate phase and implementation phase.

The planning phase often commences with the review of the existing budgets and
plans in the context of the extent to which they are delivering on the outlined key
priorities. It may also require the analysis of the extent to which the existing
municipal plans and budgeting frameworks are effective for aiding the municipality to
respond to the unfolding changes in the demands and needs of the population in a
particular municipality. When such analysis is undertaken in conjunction with the
evaluation of the overall performance of the municipality in the previous year, new
targets and objectives may have to be set to influence the development of the key
programmes that the municipality may have to develop and implement to achieve
such objectives. This process is usually followed by the preparation phase that
involves the analysis of revenue and expenditure projections vis-à-vis the key
priorities that the municipality will have to achieve. Although this process may lead to
the development of the draft plan and budget, it is still usually undertaken in
conjunction with the tabling and consultation phase.

Tabling and consultation phase deals with the consultation of the relevant
stakeholders to ensure that the all the key concerns of the major stakeholders are
integrated in the draft municipal plans and budgets. It is the inputs from tabling and
consultation processes that influence the revision and debate phase to ensure that
depending on the available financial resources that all the concerns and key
priorities are integrated in the municipal plans and budgeting processes. The
completion of the necessary amendments of the municipal plans and budgets are
often followed by the actual process of the implementation of the plan and the
budgets. Although the implementation processes are usually accompanied by
frequent in-year and annual reports and evaluation, the challenges of most
municipal plans and budgeting processes often still arise from either cash flow
problems or the tendencies to over –spend. Cash flow problems often arise from the
fact that most municipalities struggle to generate the required capital finances. This
is attributable to the rural locations of certain municipalities that affect the attraction
of the required levels of economic activities to boost revenue generations from
income taxes and levies.

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Even if the revenue generation is a challenge, in most of the cases, challenges of
cash flow also tend to arise from the poor internal skilfulness to optimise the limited
resources to implement as an array of many municipal activities as possible. In other
words, poor skilfulness and high levels of graft arising from corruption and poor
governance affect waste minimisation and the optimisation of the usually meagre
municipal financial resources. If cash flow is not the problem, the challenge may
arise from over-spending. Over-spending may arise from either the failure of the
municipality to raise the required capital finance or the tendencies of some of the
municipal authorities to be more ambitious and over spend the available financial
resources. Over-spending may also tend to be caused by the sudden changes in the
economy which causes inflationary tendencies which, in turn, cause persistent rise in
the prices of inputs above the previously planned costs and expenditures. These
challenges and deviations explain why it is also strongly emphasised in the MFMA
that strengthening municipal oversight is the other critical component of the initiatives
for sound municipal financial management and sustainability.

3.2.1.3 Strengthening Municipal Oversight

In most of the cases, poor performance of the municipality that affects its financial
sustainability tends to emerge from the weaknesses of the oversight committees.
The weaknesses of the oversight committees to rubber stamp most of the decisions
of the municipal authorities may affect vetting and analysis of the effectiveness of the
process for the accomplishment of different roles and responsibilities. It is the failure
to effectively accomplish such roles that may affect early identification and mitigation
of the variables that may affect good municipal performance and financial
sustainability. In effect, the effectiveness of the municipal oversight roles and
functions may be determined by factors encompassing the effectiveness of the
functions and roles performed by the internal political municipal oversight
committees such as the municipal public accounts committee, the effectiveness of
the functions and roles performed by the provincial and national parliament’s
oversight committees, the reporting functions of the municipal management, the
roles and functions performed by the auditor-general and the legal system of the
country.

Internal political oversight committees such as the municipal public accounts

committee tend to offer support and veto of the powers exercised by the municipal

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management authorities. This enhances the identification and remediation of the
anomalies arising from the decisions undertaken by the municipal managers during
the accomplishment of different functions. It is through such analysis that the
municipal oversight committees may be able to identify and eliminate wastes and
corruption incidents that affect the effective utilisation of the existing meagre
municipal financial resources.

However, risks of collusion between the political authorities in the municipal public
accounts committee and those in the municipal management positions may still
emerge to affect the overall effectiveness of the process for holding the municipal
managers accountable for the incidents that may affect the financial sustainability of
the municipality. This implies the intervention of the provincial or national
parliament’s public accounts committees may be critical for supplementing the roles
and functions performed by the municipal council’s public accounts committees.
Even in the events that all public accounts committees are able to effectively
exercise their oversight functions, Municipal Finance Management Act still requires
municipal managers to make the necessary reports about their financial performance
and the overall performance of the municipality.

These reports may be in the forms of monthly and quarterly budget statements, half-
yearly performance assessment, annual financial statements and annual reports.
These reports influence the effectiveness of the transparency of the process for
managing different activities of the municipalities as well as monitoring and
evaluation to ensure that all financial wastes are identified and eliminated to enhance
effective optimisation of the existing municipal financial resources.

However, considering that quite often over-reporting and information have caused
duplications that, in turn, tend to be costly, the National Treasury Review Report
(2007) emphasised the essence for the municipalities to stick to the spirit and
intendment of Section 75 of the Municipal Finance Management Act. Section 75 of
the Municipal Finance Management Act requires municipalities one major reports in
a year on their integrated development plans, the annual budgets, adjustment
budgets and budget related documents and policies. Part of the reports on the
municipal financial performance are often made available to the Office of the Auditor-
Generals for relevant opinions and recommendations on the new measures that may

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be adopted to influence the improvement of the financial health and sustainability of
the municipality.

Quite often, the common weaknesses identified to affect the effective performance of
most municipalities have often been associated with management accounting skills,
shortcomings in the operational financial management, lack of internal controls,
weaknesses in revenue management, supply chain management and asset
management. It is these weaknesses that often constitute the major challenges
causing unauthorized expenditures and fruitless and wasteful and irregular
expenditures that affect the financial sustainability of the municipality. That explains
why municipal institutional strengthening and capacity building has often been part of
the strategies for improving the financial performance and sustainability of the
municipalities.

3.2.1.4 Municipal Institutional Strengthening and Capacity Building

In most cases, the poor performance and the overall financial sustainability of most
municipalities are linked to the institutional weaknesses and poor capacity. Lack of
personnel with the necessary municipal management skills and experience often
affect the effectiveness of planning and budgeting. Some of these challenges are
often linked the required technical skills such as planning, engineering, project
management and plant operation. Such challenges may also arise from inadequate
capacity at the senior management level and lack of financial management skills.
These challenges limit effective utilisation of the existing meagre municipal financial
resources to influence the achievement of the desired outcomes.

In effect, the local municipality and the government through Section 80 of the MFMA
require all municipalities to develop and establish the budget and treasury
departments headed by a chief financial officer working in conjunctions with the other
subordinates in that department to enhance effective accomplishment of all the
activities critical for edifying effective municipality’s financial performance. Although
the municipal budget and treasury department are usually charged with the roles and
functions of improving the municipal financial management capacities, constraints
still often arise from lack of experience, insufficient senior management staffs to
groom the upcoming public finance managers, high levels of turnover among the
senior financial managers and the use of contracts that often expire.

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However, it is still often critical that the development and establishment of the
municipal budget and treasury department is accompanied by the development of an
effective supply chain management system. It requires the establishment of an
effective supply chain management system which is accompanied by the
deployment and utilisation of the competent supply chain staffs. It is not only the
deployment and utilisation of competent supply chain staffs that may influence
effectiveness of the supply chain effectiveness, but also the improvement of the level
of compliance with relevant legislations and regulations. The improvement of
compliance with relevant legislations and regulations enhances due diligence
undertaken during the process of evaluating suppliers to ensure that only suppliers
with the requisite competencies and capabilities are selected.

Quite often, major challenges of the municipal supply chain systems have been
latent in the bias selection processes that result in the selection of suppliers without
the requisite skills and capabilities. Quite often, this has led to incidents that affect
service delivery and waste of financial resources that in turn affect the financial
performance and sustainability of the municipality. In other words, the overall
competencies and capabilities of the municipality must be improved to ensure that it
is able to not only invest in activities that leverage superior service delivery, but also
the generation of enormous financial revenues to enhance the ability of the
municipality to meets present as well as future financial obligations. To accomplish
this, the municipal authorities may have to conduct relevant analysis identifying
areas of priorities and commanding heights of the municipality on which further
financial resources can be committed to instigate further growth and performance of
the municipal economy.

To minimise risks of the failure of the service delivery processes and wasteful
expenditures that often affect cost savings and the municipal’s financial
sustainability, municipal authorities may be required to integrate certain critical
principles for effective service delivery in their integrated development plans and
budgeting. These critical principles for effective service delivery include accessibility,
simplicity, affordability, quality, accountability, integration, sustainability and value for
money. Other principles include municipal competitiveness, outsourcing, public-
private partnerships and partnerships with the communities. Whereas accessibility
requires municipalities to constantly ensure that everyone within the jurisdiction of

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that municipality is able to access relevant municipal services, simplicity and
affordability demand municipal managers to explore and adopt the most efficient,
convenient and cost effective ways of delivering the required public services.

Quality requires municipal managers to adopt mechanisms for minimising wastes to

ensure that defects and costs associated with defects are minimised to influence the
overall effective performance of the municipality. As integration refers to the extent to
which the municipality uses an integrated approach to planning and budgeting,
accountability deals with the extent to which the municipal managers and authorities
are held responsible and answerable to their actions. In contrast, sustainability of the
municipality is measured by the extent to which it is able to meet its present and
future needs without struggling with the sources of funding. Quite often, public-
private partnerships are used to ensure that the public sector gains and benefits from
the unique skills and competencies in the private sector. Public-private partnership is
usually facilitated by outsourcing decisions that discerns the best partners from the
private sector that can be selected to deliver value for money for all the service
users.

In other words, as the Public Finance Management Act agitates for the development
of a sound municipal finance management system, SALGA funding model and fiscal
framework and financial management emphasizes a joint and cooperative funding
model as the strategies for edifying the improvement of the financial sustainability of
the local municipality.

3.3 POLICY FRAMEWORK: FINANCIAL SUSTAINABILITY IN THE SOUTH

AFRICAN LOCAL GOVERNMENT
The discussions of the policy framework on financial sustainability in the South
African Local Government examined SALGA funding model and fiscal framework
and financial management, local government procurement framework and its
influence on financial sustainability, and the National Development Plan and local
government financial sustainability. The details are as follows.

3.3.1 SALGA Funding Model: Fiscal Framework and Financial

Management
South African Local Government Association is a body established in the context of
Section 163 of the Constitution of the Republic of South Africa to create a structure

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that would aid the linking and coordination of all local government institutions and
municipalities in the country. SALGA aids resource mobilization and sharing across
the municipalities. Through the cooperative framework offered by SALGA, it often
becomes easier for different municipalities to gain from the unique competencies and
capabilities of more powerful and resourced municipalities. Through this, SALGA
enhances not only efficiency of local government operation, but also cost sharing
that minimises the overall cost of operation. It is through such approach that when
combined with joint planning and budgeting, SALGA also influences the
improvement of the financial sustainability of the local municipality. SALGA explores
the best ways through the limited government financial resources can be shared and
optimised across all the municipalities to not only induce improved capabilities to
effectively respond to the present service delivery needs of the population, but also
to assess the extent to which new sources of revenues can be generated from
different government programmes to finance the future demands and needs of the
new generations.

To accomplish this, SALGA operates as a schedule 3A public entity of the Public

Finance Management Act to effectively perform the main functions that include
offering an integrated voice that represent, promote and protect the interests of local
government and the all of the 278 municipalities. SALGA also integrates and
represents all the municipalities through the established key intergovernmental
relation structures at the provincial and national level. Besides undertaking measures
that deepen democracy, SALGA also provides a framework through which
municipalities are held accountable and responsible for their actions. In this process,
SALGA often facilitates improvement of the level of good governance and
accountability that, in turn, subsequently impact effectively on the municipal sound
financial management and financial sustainability. SALGA often engages in joint
planning and budgeting to achieve critical outcomes encompassing councillor
support, service delivery, social cohesion, economic development, labour relations,
sound financial management and governance system, stable municipal governance,
capacity building and institutional development.

To pull resources that would be used in the financing of different developmental

activities, SALGA uses a funding model that requires each local municipality to
contribute 0.5% of the total salary and allowances budget, as district municipalities

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are expected to contribute 0.6% of the total salary and allowances budget. This
contrasts with the approach used for the metropolitan municipalities in which each
one of the metropolitan municipalities is expected to contribute a flat rate fee of 9.1
million per annum. In addition to the contributions from the municipalities, SALGA
also raises funds through grants from the central government, donations and
sponsorships from different public entities and non-governmental organisations.

However, the challenge with this funding model is that it is not sustainable. This is
further exacerbated by the fact that the contributions from the municipalities tend to
be quite limited for SALGA to effectively meet its developmental obligations. The
implications are often reflected in the fact that most collected funds are often only
used for administrative purposes and not in the developmental activities that would
generate further sources of revenues for SALGA. It, therefore, suggests that even if
appropriate local government procurement framework is adopted, it may not
contribute much towards aiding the improvement of financial sustainability of the
local municipality.

3.3.2 Local Government Procurement Framework and its Influence on

Financial Sustainability
Procurement is one of the areas that have been significantly reviewed and regulated
in the contemporary South African local government as a strategy for enhancing cost
savings and financial sustainability of the municipalities. This is attributable to the
fact that it is through procurement that the municipality is able to control the cost of
materials and inputs. This significant improvement of cost control leverages the
improvement of the extent to which the municipality is able to utilize and optimise the
limited financial resources to finance the implementation of as an array of municipal
programmes as possible. As the effectiveness of procurement bolsters cost savings,
other values of procurement effectiveness often arise from the fact that the selection
of the best supplier or municipal service providers reduces risks of errors and waste
arising from the capabilities and competencies of the service providers to effectively
accomplish the required tasks. Since procurement comes with contractual
obligations of the municipality to the service provider, failure to have the required
work effectively accomplished implies the government will have to incur the same
expenditure again to secure the services of new municipal service providers. If such
mistakes are committed in several areas, they often pose threats that affect cost

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savings and the overall financial sustainability of the municipality. However, to
enhance cost savings and improvement of the financial sustainability of the
municipality, it is often critical for the executives in local government to evaluate the
decisions to outsource or not to outsource.

Outsourcing decisions are influenced by the extent to which the external service
providers would offer the best cost-effective and quality services as compared to the
use of the internal mechanisms to offer such services. Quite often, the internal
mechanisms used for offering the municipal services to the population include the
use of the administrative unit of the municipality or an entity developed, managed
and controlled by the municipality. Since financial sustainability is a continuous
process requiring frequent evaluation and improvements, frequent reviews of the
internal mechanisms for delivering the municipal services must be constantly
undertaken.

Such analysis would influence the evaluation of the extent to which such internal
systems and mechanisms are effectively responsive to the needs and demands of
the population. Sudden increment in the number of the residents in a particular
municipality may cause strains on the existing internal systems and resources to
undermine cost savings and efficiency of the process of service delivery. Such
inefficiencies may cause delays that affect cost savings to, in turn, cause enormous
wastes that undermine resource optimisation to leverage the overall financial
sustainability of the municipality. To evaluate the cost-effectiveness and efficiency of
using the internal systems vis-à-vis external systems, the municipal executives may
apply three main criteria encompassing direct and indirect costs as well as benefits
of using the internal versus the external mechanisms. This is often accompanied by
the evaluation of the municipal capacity, capabilities and competencies to deliver the
required tasks as well as the health and safety implications on the population.

The analysis of the implications of the adopted mechanisms will also have to
examine the implications of such a decision on employment creation, economic
growth and development as well as the overall improvement of the performance of
the economy. Such a view is accentuated in the fact that decisions causing health
and safety issues or only minimal positive effects on the performance of the
economy imply that the local municipality may have to invest in new initiatives to

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create employment and economic opportunities that, in turn, generate sources of
revenue for the municipalities. In other words, it is such duplications of expenditures
that may affect the overall cost savings and the ability of the municipalities to achieve
the desired state of financial sustainability.

To further ensure that the decision to outsource or not to outsource influences the
improvement of the financial sustainability of the municipality, Section 76(b) of the
Municipal Systems Act requires the municipalities to clearly identify the municipal
service for which the municipality intends to outsource to an external mechanism,
and an indication of the number of years for which the provision of the service
through an external mechanism might be considered. It may also require the
indication of the number of years that the process for the provision of such services
can be outsourced to the external agencies. This is attributable to the fact that to
facilitate cost savings, outsourcing must not be done in perpetuity, but only as a
temporary mechanism to permit the municipality build competencies and capabilities
before the process for the provision of such services are re-introduced to be done
internally.

In case the decision to outsource is selected, Section 80(1)(b) of the Municipal

Systems Act requires the selection process to comply with chapter 11 of the MFMA.
The selection process must also be fair for all the participants and must also
minimise risks of corruption and fraud. These provisions of Section 80(1)(b) of the
Municipal Systems Act are also further echoed in the General Procurement
Guidelines for the Government of the Republic of South Africa. Besides strongly
emphasizing the expected standards of behaviours, ethics and accountability,
procurement guidelines also reflect the commitment of the government to promoting
the procurement system that promotes the development and growth of the small and
medium size businesses.

It is the fundamental logic in the procurement guidelines that if the government is to

generate additional sources of revenue that influence increment of their financial
reserves and sustainability, then they will have to develop the procurement system
that enhance the development of the small businesses. To accomplish this, the
General Procurement Guidelines for the Government of the Republic of South Africa
require the local municipality to adhere to five pillars of procurement that include

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value for money, open and effective competition, ethics and fair dealing,
accountability and reporting and equity.

Value for money evaluates the best possible outcomes if all the factors that support
procurement are considered. Open and effective communication examines the level
of transparency exercised during and after the conclusion of the procurement
contract. Whereas ethics and fair dealing refer to the extent to which all the
competent categories of suppliers are availed with relevant critical information,
accountability and reporting examines the extent to which relevant procurement
officials are held accountable and responsible for their actions and decisions.
Although these pillars have been effective for enhancing the effectiveness of the
municipal procurement system, quite often incidents of corruption and unfair dealings
have often emerged to affect the overall effectiveness of the municipal procurement
systems. Even if the introduction of the national development plan was aimed at
creating projects that boost economic growth and development to create new
sources of revenues, it is quite evident that quite often governance and ethical
challenges have affected the effective utilisation of the available financial resources
to aid the implementation of an array of different government programmes and
projects.

3.3.3 National Development and Local Government Financial

Sustainability
The national development plan offers critical strategies for the development of a
sustainable South African government. It outlines critical priorities and directions that
would influence the guide the local municipalities and municipalities on the directions
and critical activities that they must be accomplish to become wholly sustainable.
These critical priorities and directions are reflected in the national development
plan’s strategic plan that serves to achieve four broad objectives encompassing the
provision of the main goals that the South African government aims to achieve by
2030, building key obstacles to the effectiveness of the process for the
implementation of the national development as well as the other critical strategies
that can be used to overcome such obstacles.

The other fundamental objectives of the national development plan entail the
creation of a framework and the basis of thinking that can enable the effective

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utilisation and optimisation of the existing limited public financial resources. It is on
that basis that the implementation of the national development plan would aid
improvement of the financial sustainability of the local municipality. This is
attributable to the fact that as the local municipality strives to achieve some of the
critical objectives and goals of the national development plan, then such quests often
create the impetus for local municipality to invest in areas of priorities that would not
only minimise cost savings, but also the generation of the additional new sources of
revenues. Cost savings arising from the implementation of the national development
is accentuated in the fact that the national development agitates for investment in the
socio-economic projects such as better health care facilities, better education
facilities, and housing and the living conditions and standards of living as edified by
the constant provision of electricity and water.

As government invests in these socio-economic projects, the implications are often

latent in the improvement of the standards and conditions of living of the population.
In the long run, this may impact on the reduction of the education and health
expenditures which the government has got to incur. This implies that billions of
rands in savings may be realized and invested in the other areas of priorities. As
cost-savings are realized, the other values arising from the implementation of the
national development plan may also arise from the generation of the additional
sources of new revenues. Additional sources of new revenues may arise from the
fact that as the government invests in the critical economically catalysing activities,
the implication may boost the overall economic activities. This expands the overall
taxable base that in turn would generate enormous revenues for the local
municipality.

The national development plan is not just a strategic plan, but a policy document that
aims to introduce radical change and transformation in the way the activities are
accomplished. It agitates for the change and transformation of our national
developmental activities are accomplished to create not only government projects,
but also favourable investment conditions for businesses. It is through such
approach that the national development plan would catalyse the generation of new
sources of revenues to impact positively on the financial sustainability of the local
municipality. To achieve this, the national development plan is being implemented
according to three main phases which will span over 17 years. The first stage refers

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to the critical activities undertaken in 2013 to unlock NDP implementation. These
critical stages encompass the development and implementation of programmes that
do not require additional resources and long lead times, focusing developing
compatible policies and review of the existing policies, and dialogue and negotiations
to minimise risks that often constrain the implementation of most government
programmes.

With good conditions created by these initiatives, the second phase of NDP
implementation has involved planning cycle being undertaken in the period between
20214 and 2019. It is through these planning cycles that initiatives will be undertaken
to ensure that the goals and objectives of NDP are advanced at all levels. These
planning cycles and the associated activities will be further spurred by the activities
that will be accomplished in the third phase of the process for NDP implementation
that will be undertaken in the periods between 2019-2024 and 2024-2029. It will also
require the integration of all the critical activities outlined in the national development
plan into the government plans and the processes of planning at all levels of
government.

It is through integration of the national development plan into the required critical
activities that the government would be able to cascade all the expectations in the
NDP to the local government and municipal levels. This would be edified by the
adherence to the critical principles of NDP implementation that include broad
ownership, continuous capacity building, policy consistency, prioritization and
sequencing, clarity of responsibility and accountability, continuous learning and
improvement, and coordinated actions. Even if adherence to these critical principles
would edify the successful implementation of the national development, it is still
critical to create additional conditions for NDP implementation.

Such conditions would require breaking the plan into manageable chunks,
developing detailed planning programmes, building on broad support for the
programme, building trust and confidence among key players, strengthening public
sector capacity and streamline accountability and reporting procedures. However, in
addition to the development of the appropriate conditions for NDP implementation, it
is also critical to develop appropriate financing models outlining the critical sources
of funding for the implementation of different NDP programmes. Some of these

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sources of funding may significantly entail use of government grants, donations or
funds obtained through partnerships with the international development communities
and other non-governmental organisations.

As the process for the implementation of the national development plan commences,
the process of evaluation may use certain four pillars to ensure that NDP
implementation influence the achievement of the outcomes that spur generation of
new sources of incomes and financial sustainability of the local municipality. These
ten pillars would require local municipality to consider investments in infrastructure
that lead to the crowding of productive investment, investments that support growth
and employment creation in the productive sector of the economy, elimination of red
tape and the unintended consequences of regulations, and improvement of skills
planning needs of the economy.

The other critical pillars would require undertaking investments that boost
employment creation in the agricultural sector, undertaking sustainable fiscal policy
to support growth and investment, building strong partnerships with businesses,
scaling-up public employment programmes, expanding economic opportunities to the
historically disadvantaged segments of the population, and investment in research
and innovations. However, recent studies indicate the effectiveness of the process
for NDP implementation to yet be marred by lack of funds, inadequate capacity of
the municipalities and energy challenges.

3.4 CONCLUSION
The essence for the development of a financially sustainable local government is
strongly emphasised in the 1996 Constitution of the Republic of South Africa. The
1996 Constitution of the Republic of South Africa requires executive authorities in the
local municipality to devise and adopt means of delivering services to the population
within the designated locations in a way which is within the financial and
administrative capacities of the municipalities. Whilst using limited resources and the
available capacity of the municipality, the 1996 Constitution of the Republic of South
Africa requires develop programmes that would aid the development and
entrenchment of a democratic and accountable system of government, and the
provision of services in the sustainable manner. The 1996 Constitution of the
Republic of South Africa also requires the department of local government to

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develop and implement programmes that would significantly influence improvement
of the social and economic development of the country. It is these quests to leverage
sound financial management and financial sustainability of the local municipality that
were echoed in the Municipal Finance Management Act (MFMA), No. 56 of 2003.

Most of the regulatory reforms that were introduced by the government to enhance
effective financial management and sustainability of the contemporary municipalities
and local municipalities are anchored in the Municipal Finance Management Act
(MFMA), No. 56 of 2003. The motive for the introduction of MFMA was to promote
sound financial management as the source of long-term financial sustainability at the
local government level. Sound financial management refers to the extent to which
financial decisions are based and guided on sound financial management principles
of equity, honesty and transparency to ensure that the allocated financial resources
influence the achievement of the outcomes for which they were intended. It aids the
reduction of wastes and corruption that cause loss of funds aimed for financing
different projects. To achieve this, the Municipal Finance Management Act
emphasises the need for integrated planning and budgeting, revenue, cash and
expenditure management, procurement, asset management, reporting and
oversight.

To develop sound municipal finance management system, the Municipal Finance

In other words, as the Public Finance Management Act agitates for the development
of a sound municipal finance management system, the SALGA funding model and
fiscal framework and financial management emphasises a joint and cooperative
funding model as the strategies for edifying the improvement of the financial
sustainability of the local municipality. South African Local Government Association
is a body established in the context of Section 163 of the Constitution of the Republic
of South Africa to create a structure that would aid the linking and coordination of all
local government institutions and municipalities in the country. SALGA aids resource

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mobilization and sharing across the municipalities. Through the cooperative
framework offered by SALGA, it often becomes easier for different municipalities to
gain from the unique competencies and capabilities of more powerful and resourced
municipalities. Through this, SALGA enhances not only efficiency of local
government operation, but also cost sharing that minimizes the overall cost of
operation. It is through such an approach that when combined with joint planning and
budgeting, SALGA also influences the improvement of the financial sustainability of
the local municipality.

However, the challenge with the SALGA funding model is that it is not sustainable.
This is further exacerbated by the fact that the contributions from the municipalities
tend to be quite limited for SALGA to effectively meet its developmental obligations.
The implications are often reflected in the fact that most of the collected funds are
often only used for administrative purposes and not in the developmental activities
that would generate further sources of revenues for SALGA. It therefore suggests
that even if appropriate local government procurement framework is adopted, it may
not contribute much towards aiding the improvement of financial sustainability of the
local municipality. Procurement is one of the areas that have been significantly
reviewed and regulated in the contemporary South African local government as a
strategy for enhancing cost savings and financial sustainability of the municipalities.

This is attributable to the fact that it is through procurement that the municipality is
able to control the cost of materials and inputs. This significant improvement of cost
control leverages the improvement of the extent to which the municipality is able to
utilize and optimise the limited financial resources to finance the implementation of
as an array of municipal programmes as possible. Even if the introduction of the
national development plan was aimed at creating projects that boost economic
growth and development to create new sources of revenues, it is quite evident that
quite often governance and ethical challenges have affected the effective utilisation
of the available financial resources to aid the implementation of an array of different
government programmes and projects.

The national development plan offers critical strategies for the development of a
sustainable South African government. It outlines critical priorities and directions that
would influence the guide the local municipalities and municipalities on the directions

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and critical activities that they must be accomplish to become wholly sustainable.
These critical priorities and directions are reflected in the national development
plan’s strategic plan that serves to achieve four broad objectives encompassing the
provision of the main goals that the South African government aims to achieve by
2030, building key obstacles to the effectiveness of the process for the
implementation of the national development as well as the other critical strategies
that can be used to overcome such obstacles. Against these regulatory and policy
frameworks on sound financial management and financial sustainability in the South
African local government, the discussions in the next chapter offer descriptions of the
research paradigm, design and methodology used in the primary research process.

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Chapter 4

RESEARCH METHODOLOGY

4.1 INTRODUCTION
This chapter provides the overview of the research approach used in the study. It is
indicated that whereas the research paradigm was inductive, the research design
was exploratory as the research method was qualitative. Against this backdrop, it is
illustrated that content analysis was used as the principal data collection and
analysis techniques to reach logical conclusions on the critical five research
questions that entailed the evaluation of: What are the trends influencing the
evolution of the concept of financial sustainability in the South African local
government since the dawn of Post 1994 Democratic Dispensation? What types of
financial sustainability models are used by directors and managers in the South
African local government? How effective are such models and how have they
influenced the improvement of financial sustainability and the performance of the
South African local government? What are the major inhibitors of the initiatives for
improving financial sustainability in the South African local government? Which new
theory on financial sustainability can be extracted and proposed for improving the
financial sustainability of the South African local government? All these were
accompanied by measures for enhancing credibility and the research ethical
considerations of the study.

4.2 Inductive Research Approach

In a bid to determine a new theory on financial sustainability that can be extracted
and suggested to the directors and managers in the South African local government,
the study used the inductive research approach and the exploratory qualitative
research design. In the inductive research approach, the research process
commences with the identification of the problem, setting objectives and research
questions and conducting theoretical analysis and primary research to reach the
logical conclusion on the theory or the solution that must be suggested. This differs
from the deductive research approach in which the study commences with theory
postulation or the suggestion of a new theory against which the relevant theoretical
analysis are undertaken to modify the factor structures that are subsequently
confirmed by the findings resulting from the analyzed collected primary data(Leech

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&Onwuegbuzie, 2007:265; Maruna, 2010:123). The application of a deductive
research approach is usually motivated by the circumstance where although the
details of the problems are well known, the actual solutions that can be adopted is
often the challenge. Such an approach contrasts with the exercise in the inductive
research approach which is largely exploratory and suitable for situations where the
magnitude of the problem is not known and the solutions to be adopted remain
largely elusive.

The sole application of the inductive research approach in this research is, therefore,
motivated by the fact that whereas it is quite clear that financial sustainability in the
South African local government is a challenge, the magnitude and dimensions of the
problem remains largely unclear and uncertain. The same also applies to the
suitability of the financial sustainability theory that can be suggested. On that basis,
the use of the inductive research approach is considered suitable in this research to
facilitate the use of the exploratory approach to elicit relevant information that
respond to the critical questions for this study. Through this analysis, the nature and
magnitude of the financial sustainability challenges in the South African local
government will be understood to facilitate the determining of how the theoretical
framework in Figure 1 can be modified to develop a new theory on financial
sustainability that can be proposed for improving the financial sustainability of the
South African local government. In a bid to accomplish this, the research process
involved the application of the exploratory qualitative research design, and content
analysis as the principal data collection technique for the qualitative research method
(Greene, 2007:14).

4.3 Research Design: Exploratory

A research design refers to a framework outlining critical research methods and
techniques used in the process of investigation to reach relevant logical conclusions
on the phenomenon being researched(Hewitt, Mitchell & Torgerson, 2008:23). A
research design is often post-adhoc, experimental, exploratory, historical evaluation,
co-relational analysis, and evaluatory (Morse, 2010:483; O’Cathain, 2009:3). This
research uses exploratory and evaluatory research design. Exploratory research
design connotes the process of research that seeks to only unearth underlying facts
explaining a particular phenomenon, so as to determine the logical remedial
improvement measures that can be suggested. In contrast, an evaluatory research

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design refers to the research framework that applies techniques to facilitate in-depth
analysis and interpretation of the phenomenon being investigated.

The application of a mix of exploratory and evaluatory research design in this

research is therefore motivated by the fact that as the research process sought to
explore and unearth underlying facts explaining the phenomenon being researched,
the use of evaluatory research design also enhanced in-depth analysis to enable
relevant interpretation and identification of the underlying paradoxes and a new
financial sustainability theory extracted and suggested to the directors and managers
in the South African local government. To accomplish this, the study used a
qualitative research method.

4.4 Research Method: Qualitative

A qualitative research uses techniques such as interviews and observation to
facilitate the obtaining of critical in-depth rich details that offer detailed information on
the phenomenon being investigated (Guest, 2012:5). This contrasts with the
quantitative research method that uses techniques such as surveys so as to solicit
numerical responses that can be used in the analysis to develop percentages and
indices that provide accurate explanations of the phenomenon being investigated.
This research opted for the application of the qualitative research method on the
basis that the study sought to explore the underlying facts explaining the methods
and challenges faced in the attempts to improve financial sustainability of the
contemporary South African local governments.

This is attributable to the fact that as compared to the quantitative research process,
the use of a qualitative research method provided detailed rich information that can
be used in the analysis and interpretation to identify the major paradoxes and a new
financial sustainability theory that can be proposed for improving the financial
sustainability of the contemporary South African local municipality. To achieve this,
the study used content analysis to probe five fundamental research questions that
entailed the evaluation thus: What are the trends influencing the evolution of the
concept of financial sustainability in the South African local government since the
dawn of Post 1994 Democratic Dispensation? What types of financial sustainability
models are used by the directors and managers in the South African local
government? How effective are such models and how have they influenced the

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improvement of financial sustainability and the performance of the South African
local government? What are the major inhibitors of the initiatives for improving
financial sustainability in the South African local government? Which new theory on
financial sustainability can be extracted and proposed for improving the financial
sustainability of the South African local government?

4.5 Content Analysis

Content analysis is an empirical methodologically controlled process of analyzing
texts not only to determine the presence or absence of the isolated categories of
themes and subthemes, but also to decipher the latent meanings that they offer on
the phenomenon being investigated. Derived from Ulich, Huasser and Mayring’s
(1985) longitudinal study about the psycho-social consequences of unemployment,
content analysis aids systematic text analysis to facilitate effective understanding of
the nature of the phenomenon being researched as well as the identification of gaps
or challenges and the remedial measures that can be suggested. In such analysis,
content analysis aids the identification of remedial models that can be extracted and
suggested for mitigating such challenges.

However, to accomplish these, the study applied a combination of conventional and

directed approaches to content analysis in conjunction with summative approach to
content analysis. Conventionally, theories on content analysis imply content analysis
may entail the use of either conventional approach to content analysis, directed
approach to content analysis or summative content analysis (Schilling, 2006:28).
Conventional content analysis is often applied in situations where only limited

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theories or prior studies exist. In effect, the motive of conventional content analysis is
usually not to identify theories, but to focus on the general qualitative descriptions of
the findings. This allows themes and subthemes which are relevant to the study to
naturally unfold as the findings are being described. In effect, conventional content
analysis tends to be inductive (Mostyn, 1985). In this inductive process, the use of
open-ended questions is permitted as a technique for allowing an array of relevant
information to emerge from the overall analysis of the available data. Such a process
often commences with detailed data evaluation, identification of themes and
subthemes and analysis of how the relationships and inter-relationships across all
categories of themes and subthemes offer meaningful explanation of the
phenomenon being investigated.

In contrast to the approach in conventional content analysis, in directed content

analysis, the application of content analysis is often instigated by the fact that the
existing theories are incomplete or their applications need to be extended to new
organizational situations. In such situations, content analysis is guided by the
developed theoretical framework to aid the identification similar themes and new
themes that offer coherent explanations to the phenomenon being investigated. In
this research, directed approach to content analysis was used on the basis that the
application of most contemporary theories on financial sustainability has not been
extended in situations pertaining financial sustainability in the South African local
municipality.

At the same time, a challenge arises from the fact that although the notion of
financial sustainability has been evaluated by several authors (Bergmann &Grossi,
2014:90; Izza, 2012:9; Organisation for Economic Co-Operation and Development-
OECD. 2009:14; Manuzi, 2015:6), different aspects of the measures for enhancing
financial sustainability seem to have been evaluated and suggested by different
authors. Leon (2001) suggests four pillars of financial sustainability to encompass
strategic financial planning, income diversification, sound financial administration and
management, and own income generation. As most authors on financial
sustainability in the public sector reiterate the three foundational constructs of
financial sustainability that edifies the improvement of financial sustainability of the
modern governments to be associated with financial risk management, financial
governance and financial ethical leaders can undermine the initiatives for enhancing

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a public sector organisation’s financial sustainability (Bergmann &Grossi, 2014:90;
Izza, 2012:9; Organisation for Economic Co-Operation and Development-OECD.
2009:14; Manuzi, 2015:6).

To assess the overall level of the maturity of financial sustainability of a public sector
organisation, Birney et al. (2010:7) suggest that evaluations can be undertaken using
five spectrums that include: at risk, compliance-based, incremental, strategic and
systematic. Despite the contribution of such theories to the development of the
literature on financial sustainability, such discrete approach to the evaluation of the
notion of financial sustainability affects the integrated holistic approach that most
governments are able to adopt and apply to edify effectiveness of financial
sustainability.

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Figure 1: A Conceptual Model on Financial Sustainability of the South African Local
Government

Source: Derived from the Authors’ Interpretation and Conceptualisation of theories

on Financial Sustainability in the South African Local Government

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Such conceptual shortfall is further exacerbated by the fact that although theories by
authors such as Birney et al. (2010:7) and Leon (2001) offer a comprehensive
perspective of the constructs critical for developing a financially sustainable public
sector, its applicability in the context of the South African public sector organisations
seems to have not been explored by most of the authors. To address this gap, this
research sought to use the holistic theory conceptualised in Figure 1 to assess and
develop an integrated model that can be tested, validated and suggested to the
managers in the South African local municipality. It is argued in the conceptual
model in Figure 1 that the integrated approach for improving financial sustainability in
the South African local municipality is often predicted by four main discourses.

The first discourse would require the development and application of four main pillars
of financial sustainability encompassing strategic financial planning, income
diversification, sound financial administration and management and own income
generation. The edifying effects of these four pillars are further catalysed by a
continuum of financial and non-financial sustainability constructs. It is at this point
that this research sought to fill one of the gaps arising from the fact that although
financial sustainability exceeds the notion of financial sustainability to emphasise the
initiatives for improving sustainability, most authors emphasise only financial factors
are prerequisites for achieving sustainability.

In this endeavour, the three foundational constructs that would influence financial
sustainability are reiterated in Figure 1 to encompass financial risk management,
financial governance and financial ethical leadership. The effectiveness of these
constructs is catalysed by a continuum linking such three constructs to the mainly
three foundational non-financial constructs encompassing political stability, fiscal and
economic stability, forecasting and sensing to mitigate the devastating negative
effects of natural calamities and disaster. As the application of such integrated
constructs influence improvement of financial sustainability, it is still often critical that
an appropriate framework is developed to evaluate the overall maturity of the
financial sustainability of the local municipality according to four perspectives that
include liquidity, resilience, service and fiscal responsibility, and public confidence.
This must also be accompanied by the application of five spectrums aligned to
Birney et al.’s (2010:7) five spectrums of a government’s financial sustainability that
include: at risk, compliance-based, incremental, strategic, and systematic. These

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pre-developed theoretical themes in Figure 1 laid the foundation for conventional,
directed and summative content analysis. In summative content analysis, the motive
of the analysis is not only to identify themes and subthemes as well as the
relationships between them, but also to holistically interpret the meanings that the
entire text being analysis offer in the context of the phenomenon being investigated
(Schilling, 2006:28). In effect, the entire process of content analysis was
accomplished using four main steps encompassing:

 The analysis of the contemporary core theories on financial sustainability in

the public sector organisations;
 Document analysis on the trends and approaches for enhancing financial
sustainability in the South African Local municipality;
 Triangulation of the core theories on financial sustainability in the public sector
organisations with the results of document analysis on the trends and
approaches for enhancing financial sustainability in the South African local
municipality; and
 Enhancing credibility, dependability and transferability of the results of content
analysis.

The details of these are evaluated below.

 Analysis of the contemporary core theories on financial sustainability in

the public sector organisations
The analysis of the contemporary core theories on financial sustainability in the
public sector organisations was accomplished in chapter 2 of this thesis. While
mainly guided by the research topic, content analysis in this area entailed thorough
evaluation of various textbooks and academic journals on financial sustainability
(Pool, 1959). The process of analysis in this area was structured according to four
sections that include financial sustainability in the contemporary public sector
organisations, models for financial sustainability of public sector organisations,
paradoxes of local government financial sustainability and theories for measuring
and improving financial sustainability of the contemporary public sector
organisations. In terms financial sustainability in the contemporary public sector
organisations, the analysis was guided four steps’ strategic cyclical financial
sustainability framework that entail environmental analysis, identification of the

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sources of revenues and revenue generation, managing the utilisation of the
generated revenues, and monitoring and evaluation. The models that were analysed
included Leon’s (2001) four pillars (strategic financial planning, income
diversification, sound financial management & administration, and income
generation) of financial sustainability, five capitals’ (natural capital, human capital,
social capital, manufactured capital & financial capital) theory of financial
sustainability, and the three foundational constructs (financial risk management,
financial governance & financial leadership) of financial sustainability.

The analysis of the major paradoxes of financial sustainability in the contemporary

public sector organisations was guided by themes such as poor analysis and
identification of the level of financial sustainability maturity, lack of suitable
government financing models, poor strategic financial planning and budgeting and
lack of effective models for managing equity. On the other hand, review and analysis
of the theories for measuring and improving financial sustainability of the
contemporary public sector organisations were guided by theories on financial
sustainability measurement and reporting, outline and identification of indicators for
measuring financial sustainability, effective use of integrated sustainability reporting,
strategic change management for fiscal sustainability and long-term management
and improvement of financial sustainability.

 Document analysis on the trends and approaches for enhancing

financial sustainability in the South African Local municipalities
Document analysis on trends and approaches for enhancing financial sustainability
in the South African Local municipality was accomplished in chapters 3 and 5 of this
thesis. This entailed review and analysis of books, academic journals, and
government documents containing the constitutions and legislations, government
gazettes, government reports and reports by oversight bodies on financial
sustainability in the South African Local Government. In Chapter 3, the focus of the
analysis was directed on the evaluation of the regulatory and policy frameworks that
offer the basis for sound financial management and financial sustainability in the
South African local government. In terms of the regulatory framework on financial
sustainability in the South African Local Government, the analysis examined
provisions of the 1996 Constitution of the Republic of South Africa that emphasise
the need for sound financial management and financial sustainability in the local

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municipality. The analysis also encompassed evaluation of the implications of the
Municipal Finance Management Act (MFMA), No. 56 of 2003 on enhancing sound
financial management and financial sustainability in the South African local
government sphere.

On the other hand, the analysis of policy framework on financial sustainability in the
South African Local Government examined SALGA funding model and fiscal
framework and financial management, local government procurement framework
and its influence on financial sustainability, and the National Development Plan and
local government financial sustainability. As in Chapter 5, the research questions
outlined in Chapter 1 of this thesis guided document analysis and interpretation of
the findings in accordance with three sections encompassing; trends influencing the
evolution of the concept of financial sustainability in the South African local
government since the dawn of Post 1994 democratic dispensation, financial
sustainability models and methods used by the directors and managers in the South
African local government, and inhibitors of the initiatives for improving financial
sustainability in the South African local government.

In terms of trends influencing the evolution of the concept of financial sustainability in

the South African local government since the dawn of Post-1994 democratic
dispensation, the document analysis was guided by themes such as the emergence
of the concept of a developmental state, changes in demographical trends, financial
optimisation regulations, and stronger financial controls and oversights exercised by
regulatory institutions and decentralisation. The financial sustainability models and
methods examined include the Central Financial Grant System, SALGA’s Model for
Financial Sustainability, Investment in Revenue-generating Activities and Managing
Municipal Operational Efficiency as a Driver of Cost Minimisation. On the other hand,
the analysis of the inhibitors of the initiatives for improving financial sustainability in
the South African local government was guided by themes such as inadequate
municipal capacity, limited income generating activities, deficient local government
procurement systems and poor leadership and governance.

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 Triangulation of the core theories on financial sustainability in the public
sector organisations with the results of document analysis on the trends
and approaches for enhancing financial sustainability in the South
African Local municipality
The motive of this triangulation was to discern the underlying latent meanings of the
entire findings in the context of the quests for leveraging financial sustainability in the
local municipality. As indicated in Chapter 5, the process of analysis was guided by
the key discourses in the conceptual model on local government financial
sustainability in Figure 1 that includes:

 Four pillars (strategic financial planning, income diversification, sound

financial administration and management, and own income generation) of
financial sustainability;
 Three foundational constructs (financial risk management, financial
governance and financial ethical leadership) of local government financial
sustainability;
 Three foundational non-financial constructs (political stability, fiscal and
economic stability, forecasting and sensing to mitigate the devastating
negative effects of natural calamities and disaster) of local government
financial sustainability; and
 Measuring the overall maturity of the financial sustainability of the local
municipality according to four perspectives (liquidity, resilience, service and
fiscal responsibility, and public confidence) of local government financial
sustainability in conjunction with five spectrums (at risk, compliance-based,
incremental, strategic, and systematic) of local government’s financial
sustainability.

It is this analysis and triangulation which led to the extraction of the local government
financial sustainability model which can be replicated by the South African local
municipality. Nonetheless, all these were accompanied by measures for enhancing
credibility, dependability and transferability of the results of content analysis.

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 Enhancing credibility, dependability and transferability of the results of
content analysis
Trustworthiness refers to the extent to which the findings of the study can be easily
believed and utilised for not only making the necessary generalisation about the
phenomenon being investigated, but also logical decisions on the critical
improvement actions that can be undertaken. Trustworthiness is often assessed by
evaluating the credibility, dependability, transferability and confirms ability of the
study (Morse, 2010:483; O’Cathain, 2009:3). In this research, credibility,
dependability, transferability and confirm ability of the study was assessed to
enhance the overall trustworthiness and believability of the study. Credibility
connotes the rigour that was used in the study to ensure that the resulting
conclusions and suggestions are not only trustworthy, but also believable.

In this research, the first initiative of ensuring the credibility of the study was
undertaken by conducting thorough exploratory analysis. The application of the
measures for enhancing credibility of the study was also accompanied by the
initiatives for improving the dependability of the study. Dependability refers to the
extent to which the findings of the study can be relied on when making relevant
critical decisions (Hewitt et al. 2008:23).

In this research, dependability of the study was enhanced by ensuring that the
development of guiding themes and subthemes was guided by theories and the
overview of the problem statement in Chapter 1. This enhanced ensuring that the
guiding themes and subthemes used in the study facilitated the eliciting of only
critical information relevant to the study. To further improve the credibility and
dependability of the study, triangulation of the findings was undertaken and
compared with the views expressed in theories in order to evaluate whether the
findings are strongly supported in the previously conducted empirical studies. This
not only improved the credibility and dependability of the study, but also the
transferability of the study on the basis that if a similar study was to be conducted,
similar findings would still be obtained. Transferability refers to the extent to which
the findings and conclusion of the study can be replicated in a similar setting
(Maruna, 2010:123; Bustamante & Nelson, 2010:56). Transferability evaluates the
external validity of the study by assessing the extent to which if a similar study was
to be conducted; such similar results would still be obtained. In addition, the other

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measure for ensuring the credibility and dependability was accomplished by ensuring
that the process of interpreting and discussing findings are undertaken only within
the meaning of the pre-developed theoretical framework. In other words, the
application of the measures for enhancing transferability of the study also improved
the conformability of the study. Conformability refers to the extent to which other
studies agree or corroborate the findings of the study. This research used measures
such as fact-checking and comparison and contrasting of the research findings with
the findings of the previous studies (Clark, 2010:428). All these were accompanied
by the use of methodological and theoretical triangulation, as well as peer debriefing
and checking to improve the overall conformability of the study.

4.6 DELIMITATION
Financial sustainability is a challenge which is faced across most of the
contemporary government departments. However, this research was limited to the
department of local government. To enable the identification of major hurdles and
appropriate solutions that can be suggested, the study collected qualitative data from
across the different local government spheres. Since the study was limited on local
government, it implies if any other government department aims to adopt the new
financial sustainability theory suggested, it will be able to only do so subject to
modifications to suit their unique organisational conditions.

4.7 ETHICAL CONSIDERATION

Research ethics refers the extent to which the relevant rules and codes of conducts
have been complied with to improve the overall integrity and reliability and the
believability of the research (Morse, 2010:483). It deals with the morals of ensuring
that the research is conducted and accomplished within the acceptable standards
and codes of behaviours. Ethics is about right and wrongs, individual integrity and
association beyond individual level (Voils & Knafl, 2009:208). In this research, the
measures used to improve ethical considerations of the study entailed upholding the
principles of informed consent, respect to anonymity and confidentiality, respect of
the rights of those involved in the research, respect of privacy, avoidance of harm to
the participants and avoidance of conflict of interest (O’Cathain, 2009:3). The
principle of informed consent was upheld by ensuring that all the participants in this
study are informed about the motive of the study. The participants were informed

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that although the study is purely academic, it was still critical to wilfully participate in
the study and that if they elected to participate, they were still free to withdraw.

However, they were informed that it is important to be objective and honest in their
responses to different questions even if they were dissatisfied with certain things. In
regard to upholding the anonymity and confidentiality, the study avoided mentioning
any participant by name. Instead, the participants were labelled according to the
Arabic numbers of 1 up to 35 to enhance the ease of data analysis. All these were
accompanied by respect of the rights of those involved in the research by ensuring
that the participants are not forced to participate or say anything against their will.
Whereas, these may improve respect of privacy and avoidance of harm to the
participants, initiatives were also be undertaken to avoid conflict of interest by
avoiding taking sides or receipt of any benefits that would have swerved opinions
during the interpretation and discussion of the findings of the study. The study also
integrated the measures for improving ethical practices during the research process.

Ethics refer to the moral principles that guide the process of the accomplishment of a
study. Such principles are often linked to confidentiality, anonymity, respect and
avoidance of harm to the participants in the study. In this research, ethical
considerations were upheld by ensuring the confidentiality and anonymity of the
identities of the participants in the study. This is attributable to the fact that since the
study explores the determinants of financial sustainability, some of the information
solicited was sensitive. The upholding of the principles of confidentiality and
anonymity therefore facilitated not only the respect of their wishes of their identities
not to be revealed but also the avoidance of harm. To ensure that these principles
are upheld, relevant ethical guidelines obtained from the University were signed and
submitted for approval by the UFH Research Ethics Committee.

4.8 CONCLUSION
This chapter provides the overview of the research approach used in the study. It is
indicated that whereas the research paradigm was inductive, the research design
was exploratory as the research method was qualitative. Against this backdrop, it is
illustrated that content analysis was used as the principal data collection and
analysis techniques to reach logical conclusions on the critical five research
questions that entailed the evaluation of: What are the trends influencing the

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evolution of the concept of financial sustainability in the South African local
government since the dawn of Post 1994 Democratic Dispensation? What types of
financial sustainability models are used by the directors and managers in the South
African local government? How effective are such models and how have they
influenced the improvement of financial sustainability and the performance of the
South African local government? What are the major inhibitors of the initiatives for
improving financial sustainability in the South African local government? Which new
theory on financial sustainability can be extracted and proposed for improving the
financial sustainability of the South African local government? All these were
accompanied by measures for enhancing credibility and the research ethical
considerations of the study. The following chapter offers results of the document
analysis and interpretation of the findings.

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Chapter 5

ANALYSIS AND INTERPRETATION OF FINDINGS

5.1 INTRODUCTION
In line with the research questions outlined in Chapter 1 of this thesis, document
analysis and interpretation of the findings are presented in this chapter according to
three sections encompassing: trends influencing the evolution of the concept of
financial sustainability in the South African local government since the dawn of Post
1994 democratic dispensation, financial sustainability models and methods used by
the directors and managers in the South African local government, and inhibitors of
the initiatives for improving financial sustainability in the South African local
government. The details are examined below.

5.2 TRENDS INFLUENCING THE EVOLUTION OF THE CONCEPT OF

FINANCIAL SUSTAINABILITY IN THE SOUTH AFRICAN LOCAL GOVERNMENT
SINCE THE DAWN OF POST-1994 DEMOCRATIC DISPENSATION
Trends influencing the evolution of the concept of financial sustainability in the South
African local government since the dawn of Post-1994 democratic dispensation arise
from the emergence of the concept of a developmental state, changes in
demographical trends, financial optimisation regulations, and stronger financial
controls and oversights exercised by regulatory institutions and decentralisation. The
details of these trends are evaluated below.

 Emergence of the Concept of a Developmental State

The emergence of the concept of a developmental state influenced the emergence
of the need to strongly emphasise the need for financial sustainability of the local
municipality. The question of the developmental state examined the extent of state
involvement in the determination of the economic and developmental direction of the
South African economy. In this regard, if the debate emphasised the stronger need
for state involvement, then, it implied the government would be required to provide
various socio-economic services to various segments of the population. To
accomplish this, the government would have to raise sufficient funds in conjunction
with the undertaking of the simultaneous measures that would leverage the
optimisation of the existing resources. In contrast, if the government was to play only
partial roles in economic development of the economy, then, the financial obligations

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placed on it to meet different needs would be reduced. However, considering the fact
that the country was just emerging from the ages of enormous discrimination and
inequalities that affected a majority of South Africans, the situation in which the
government would play only limited roles was the initiative that the South African
government was unwilling to accept.

These debates are reflected in the Reconstruction and Development Programmes

(RDP), National Framework Agreement (NFA) and Growth, Employment and
Redistribution (GEAR). The major argument in Reconstruction and Development
Programmes (RDP) was for the establishment of a developmental state in which the
government in conjunction with civil societies plays significant roles towards
determining the economic direction of the country. In this, the government would be
involved in the provision of different services to an extent which is sufficient for
affecting the redress of the negative effects of the previous socio-economic
inequities.

Such a view was also echoed in the National Framework Agreement (NFA) that
agitated for restructuring of the economy. It added that restructuring did not imply
reducing the intervention roles of the state. Instead, it suggested significant state
intervention in the restructuring of the economy to spur the improvement of the
overall level of economic growth and development, meeting basic socio-economic
needs of the population, redeployment of assets for growth as well as infrastructural
development by mobilizing and redirecting private sector capital. It also required
state debt reduction, enhancing competitiveness and efficiency of state enterprises
and human capital development. This suggests generation of adequate financial
resources would be critical for leveraging the capabilities of the government to effect
the process for the implementation of all such programmes. In a bid to either fill the
financial gap or boost the capacity to implement all these programmes, the
government either sold some shares in state-owned enterprises such as Telkom and
Transnet or engaged public-private partnership. The implications are latent in the
fact that although Growth, Employment and Redistribution (GEAR) advocated for
less state ownership, but intervention to create conditions conducive for investments
by the private sector as the major stimulant for economic growth and development,
the trends undertaken since then has been skewed towards the establishment of a
developmental state. In the implementation of this developmental state, quests for

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new sources of revenue as well as how to optimise the existing limited financial
resources becomes quite critical for determining the extent to which a government
delivers on its socio-economic objectives and goals. Since resource generation and
optimisation are all critical constructs of financial sustainability, all these demonstrate
the extent to which the emergence of the notion of financial sustainability was
spurred by the establishment of a developmental state.

In other words, the introduction of the concept of a developmental state influenced

the development of policies that in turn renders South African to compare favourably
in the Brics’ region. This is attributable to the fact that in terms of supportive policies,
most of South Africa’s policies strongly support business establishment and
development. This is latent in the Global Competitiveness Index (2015) that places
South Africa in the first position for ease of doing business. This is attributable to the
fact that in a bid to spur the overall pace of economic growth and development, the
government created favourable policies and legislations that eliminate bureaucracy
and red tapes for business commencement to spur the overall ease of business
establishment, obtaining construction permits and getting credit, investor protection
and tax payments. These initiatives to leverage the overall attractiveness of the
South African market have also been accompanied by easing investments in most
sectors of the economy.

Apart from investments in sectors such as security, which is stringently controlled,

there are no policy restrictions for investments in some of the lucrative sectors such
as agriculture, forestry, fishing, mining and quarrying, manufacturing, energy
generation, construction, retail and wholesale. The South African market also offers
enormous opportunities in unrestricted markets such as tourism, hotel and
hospitality, property development as well as banking and finance. The basis of this
increasingly attractive economy for businesses was laid in the political and economic
agendas of Reconstruction and Development Programme (RDP), National
Framework Agreement (NFA) and Growth, Employment and Redistribution (GEAR).
These political and economic frameworks agitated for the creation of a development
state in which government simultaneously works with the private sector in facilitating
economic growth and development.

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As these policies influenced the recognition of a vibrant private sector as a pillar for
faster economic growth and development, it also influenced the adoption of policies
and systems that would bolster the creation of favourable investment conditions for
local and international businesses. This is accentuated in the fact that most of the
later policies such as the National Development Plan, Invest SA and the National
Infrastructure Plan aimed at creating more conducive investment environments for
the private sector. The National Development Plan (NDP) recognises the
development of a thriving private sector as critical for catalysing economic growth as
well as reducing inequality and unemployment from 25% to 6%. To achieve these
targets, the NDP relies on two economic frameworks that include New Growth Path
and Industrial Policy Action Plan.

However, New Growth Path aims to boost economic growth and development in a
more equitable way, the Industrial Policy Action Plan advocates for investment and
promotion of the involvement of the previously disadvantaged groups in the broader
industrialisation of the economy. To achieve this, the government, through its
National Infrastructure development, aims to undertake large-scale state investment
in infrastructure and support of small and medium size business development. These
initiatives are being accompanied by specific interventions in key specific areas of
the economy such as energy.

In terms of energy development to improve reliability of energy supplies as a critical

determinant of industrialisation, Eskom has committed more than ZAR 155.3 billion
towards the construction and expansion of Medupi and Kusile power stations. Yet, in
addition to $3.5million committed on feasibility study to expand and transmit
Mozambique’s hydro-power and diversity South Africa’s power supply, a new
transmission line is also being developed from Zimbabwe. In other words, all these
contribute to improving investor confidence about the certainties about South Africa’s
future economic opportunities. All these are being accompanied by increment in
infrastructure developments like the improvement and expansion of the capacities of
the existing ports as well as roads like the great South-Northern Corridor that will run
from Durban to Tanzania. This accentuated in the fact that about ZAR865.4billion
has already been committed towards the finance of different infrastructure
development initiatives. With the on-going creation of a largely attractive investment
environment, the South African government has also in partnership with the private

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sector been engaging in the promotion of Invest SA. Invest SA is a programme that
seeks to lure more local and foreign investors to consider investment in South Africa.
This is being undertaken by the development of one-stop shops at the national and
provincial levels to help businesses with information on starting and running a
business in South Africa. Such initiatives are also being accompanied by
streamlining and easing access to business registration and authorisation processes.

The government also aims to use incentives such as the ZAR20 billion offered to the
automotive industry to boost productivity and competitiveness of South Africa’s
economy. Similar incentives are also being used to strengthen skills, innovation,
technological development and competitiveness in key priority sectors that include
health, mining, education and energy development. Nevertheless, as part of Invest
SA programme, the government has also been creating and promoting the
development of special economic zones as part of the economic initiatives for
stimulating economic growth and development.

In these initiatives, investment in special economic zones does not only offer free
land for business establishment, but also accessibility to soft loans as well as tax
waivers for a certain period of time. In other words, as compared to BRICS countries
such as Brazil and Russia, these illustrate the extent to which the undertaken
government policies are offering enormous opportunities for businesses. Yet, such
opportunities seem also to be further edified by the opportunities unfolding in the
South Africa’s economic trends. As the establishment of a developmental state
instigated the need for financial sustainability, changes in demographical trends also
emerged as the other factor influencing the essence for the development of a
financially sustainable local government.

 Changes in Demographical Trends

Changes in demographical trends are at the forefront of the factors influencing the
increasing emergence and evolution of the concept of financial sustainability. Since
1994, the South African population has significantly grown from about 20 million as
of the 1990s to about 45 million as of 2016. This significant increase in population
growth exerts enormous pressure on the central and local government authorities.
This pressure is emerging from the increasing demands for different socio-economic
services such as housing, health, education, water and sanitation services. In effect,

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the government has got to react and respond to the different unfolding competing
needs and demands of its population. However, without an effective system for
financial control and management, it has often not easy for most local municipalities
to respond to different challenges. Central and local municipalities can easily use
resources in a way that enhances the meeting of all demands. That implies apart
from ensuring that all the allocated financial resources are utilised for fulfilling the
purposes for which they were allocated, the local municipality must also be able to
generate additional new sources of revenues.

This point above is exacerbated by the fact that although grants from central
government are a major source of funds for the local municipality and municipalities,
in most cases, the allocated funds are insufficient to respond to different competing
socio-economic needs and demands of the population. In effect, apart from using the
existing resources in more economical way, central and local governments have to
innovatively initiate new sources of revenues. Even though the central government
relies significantly on revenues from taxes and other fees charged for different
services, at the municipal level, there is often a challenge of generating new sources
of revenue inflows.

In most cases, municipalities in the relatively attractive economic locations and urban
centres tend to draw enormous sources of revenues from levies and property taxes.
However, that is not the case for municipalities in more rural areas that struggle to
even generate sufficient funds from their levies and property taxes. This affects the
level of financial sustainability of the local government sphere as well as the extent to
which they are able to effectively respond to the competing needs and demands of
the population in their jurisdictions. Even some of the metropolitan municipalities are
often able to generate enormous funds from levies and taxes; there is often still a
challenge of generating additional sources of revenues.

Following the end of apartheid, most socio-economic services such as health are
mainly delivered for free without even the use of cost-sharing to generate partial
revenues that could have been used to leverage the effectiveness of the process for
delivering relevant socio-economic services. In other words, there is yet a challenge
of income generation. That renders the optimisation of the existing financial
resources of significant essence for meeting the different competing demands of the

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population. However, it is also evident from the analysis that although the large
South African population is a burden and a challenge, such a large population also
influences the overall attractiveness of the South African markets.

Attractive markets attract businesses of which in turn the South African government
gains from revenues obtained through taxation of the businesses reaping such
opportunities. This boosts the overall level of revenue generation to impact positively
on the improvement of the level of financial sustainability of the local municipality.
Such a view is accentuated in the fact that despite a few hurdles, the economic
trends in South Africa offer enormous opportunities for businesses. Most of these
opportunities are drawn from the relatively larger South Africa’s population of 45
million people. This larger population offers markets for different products.

However, due to the larger number of relatively low income class, it is often the
demands for cheaper products that are on the rise. Among major products
experience significant increase in demand are houses, household appliances,
apparels, automobiles and groceries for daily usage as well as demands for
education and healthcare services. This is attributable to the fact that as a significant
number of the previously disadvantaged people work their ways from the previously
poor conditions to better living conditions and standards, it is the demand for basic
products such as cheaper houses, cars, healthcare and education which is on the
rise. As the demand for cheaper items such as household appliances and apparel
skyrocket, it is has often been the relatively cheaper imports from China that have
been performing well in the South African markets.

This has, however, caused the decline in the performance of the South Africa’s
manufacturing sector to imply businesses that aim to invest in the South African
markets must focus on the production and sale of relatively cheaper products. Such
a strategy would significantly bolster the capabilities of the local businesses to
counter competition from the relatively cheaper Chinese imports.

Even though there is increasing emergence, of the wealthy South African middle, the
number of the people falling in that segment is still yet few. That signifies businesses
that aim to focus on the increasingly sophisticated demands of the middle class
population would certainly be required to niche into such markets. This is
accentuated in the fact that although the demands of the increasing population in the

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middle class is increasingly turning complex in terms of the demand of quality and
ostensible goods, prices of different goods and services are still critical determinants
of consumers’ purchase decisions. This is because the rise in South Africa’s middle
class population is attributable to the rise in increasingly wealthy black South
Africans. Such wealthy rich middle class live in extended families to imply that in
order to meet the needs of all the family members, the prices at which different
required goods and services are sold may tend to be a critical determinant of their
purchase decisions. At the same time, as the overall level of education and literacy
of the South African population improve, it is not only the prices of goods that are
critical determinants, but also the quality of such products and services.

South African consumers are increasingly becoming quality conscious; this implies
that businesses that do not meet such quality needs are most likely not to perform
well in most South African markets. However, even in the midst of such unique
demands, the fact still remains that the rise in the black wealthy middle class is
steering an increase in consumer expenditure and demand to determine the overall
attractiveness of the South Africa markets. A significant rise in the wealthy black
middle class is attributable to their ease of access to credits as well as improved
education levels that in turn influence the extent to which they are able to find well-
paying jobs. The other reasons are linked to the progress so far achieved through
the implementation of Black Economic Empowerment (BEE) across different South
African private and public sector organisations.

As these BEE successes fuel the overall attractiveness of the South African markets,
the other causes of the attractiveness of the South African economy are linked to
strongly control of inflation, interest rates and exchange rates. As a result of well-
developed and sound fiscal framework, inflation is often effectively controlled. Higher
inflations affect the stability of prices as well as prices of inputs. Inflation also affects
demand on the prices that as the prices of inputs increase, businesses also tend to
increase prices of finished products that, in turn, also cause the demand of most
products with elastic demand to fall. However, with strongly controlled inflation,
businesses operating in the South African markets have been able to gain from
relatively stable prices of inputs. This influences business certainties as well as
future certainties in terms of the projected revenues. The same levels of control has
also been exercised in regard to interest rates of which lower interest rates have

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contributed to lowering the cost of capital to spur the overall decline or stability of the
cost of capital for businesses that rely on borrowing from different financial
institutions. As such trends suggest the overall attractiveness of the South African
economy, the other positive aspects of the South African economy has been
reflected in foreign exchange controls. Whereas all the other sectors are liberalised,
the South African foreign exchange market has not yet been liberalised. In effect,
foreign exchange transactions are strongly regulated and controlled.

Although such approach causes difficulties that businesses experience when

undertaking different foreign exchange transactions, the positive effects have been
reflected in the improved controlled of foreign exchange rates. This contributes
enormously to protecting the rand from devaluation and depreciation against the
dollar. For businesses that rely on exports, this may affect the prices of their
products in the world market as compared to businesses that rely on imports of
critical inputs. In other words, despite certain limitations, this strongly controlled
inflation, interest rates and exchange rates seems to have contributed to have
created a vibrant economy that leverage the overall level of opportunities that
businesses are exposed to.

However, in addition to these attractive signs have been government initiatives to

increase and expand the South African market by not only cooperating with regional
bodies such as AGOA, but also BRICS and SAD Countries (Southern African
Development Community) economies. These initiatives have influenced the
expansion of the South African market on the basis that as South African businesses
exploit SADC markets; they also tend to use it as the path to the larger African
market.

Even if all these imply enormous opportunities exist in the South African markets,
there are also risks. The risks are linked to the fact that as the boom in the South
African markets fuel increasing attraction of different businesses, the challenges
have also been reflected in the increasing competition and volatilities of the South
African markets. For businesses investing in South Africa that implies the adoption of
the appropriate strategies is critical for leveraging their sustainability. However,
besides the influence emerging from the changes in South Africa’s demographical
trends and figures, the other factor influencing the emergence and evolution of the

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concept of financial sustainability in the South African local municipality has been
associated with the promulgation of an array of financial optimisation regulations
(Gyong, 2014:71).

 Financial Optimisation Regulations

The promulgation of an array of financial optimisation regulations are reflected in the
emergence of Public Finance Management Act (PFMA) No. 1 of 1999 and the
Municipal Finance Management Act (MFMA) No.56 of 2003. As echoed in Section
196 of the Constitution of the Republic of South Africa, these regulations require
stringent monitoring and evaluation to ensure the allocated financial resources are
optimised when financing the purposes for which they were allocated. PFMA and
MFMA do not only emphasise the need for monitoring and evaluation, but also the
importance for the level of financial optimisation to be influenced by an effective
budgeting and financial planning (Khaile, 2011:3; Lindberg, 2009). It is through
financial budgeting and planning that the local municipality would not only be able to
eliminate wasteful expenditures, but also to optimise the limited resources to meet as
an array of different needs as possible.

Financial optimisation as required in these legislations significantly impacts on cost

savings to in turn leverage the overall level of the funds that municipalities are able
to retain as their financial reserves. It is the amount the municipality has in its
financial reserves that influences its financial sustainability. This is because it is
through such financial reserves that the municipality is able to demonstrate their
capabilities to meet the present as well as future needs. This view is strongly
recognised in PFMA and MFMA that financial sustainability is not only achieved by
generating new sources of revenues, but also through minimisation of the existing
funds in the way that leverages cost savings and increment.

Yet, as Section 196 of the Constitution of the Republic of South Africa in conjunction
with the provisions of PFMA and MFMA agitate for financial optimisation, the effects
are not only reflected in the need for improved monitoring and evaluation, but also in
the importance for intense financial risk analysis and mitigation(Khaile, 2011:3;
Lindberg, 2009). These legislations advocate for effective financial risk management
as one of the strategies for identification and mitigation of risks that cause financial
wastes. Financial risk management refers to the process of analysing, identifying

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and mitigating of the wastes that would affect financial sustainability. Increased level
of financial wastes affects the amount of funds that a municipality is able to retain in
its reserves (Borowiak, 2011; Community Law Centre, 2008; Darcy, 2010:198). This
subsequently affects the extent to which a municipality is able to retain as adequate
funds in its reserve to enhance the effective meeting of the needs of the present as
well as the future generation.

In a bid to entrench a culture of financial risk management, the Constitution, by

implication, bestows on the directors and managers in public departments the
mandate to exercise the necessary due diligence to ensure that all the implemented
government projects and programmes achieve the desired strategic objectives and
goals (The Public Service Commission, 2011:66). In a bid to achieve this, the South
African Government’s General Procurement Guidelines (2013:16) acknowledges that
risk management is one of the tools and techniques which can be used for ensuring
effective planning and accountability by the directors and managers in government
departments.

While deriving from Section 196 of the South African Constitution, the roles and
responsibilities for the implementation of a risk management strategy in all the
modern South African public sector organisations is now contained in the regulations
published in terms of the Public Finance Management Act (PFMA), 1999 and later
amended by the National Treasury’s (2009) Framework for Risk Management in
public sector organisations. The National Treasury’s (2009) framework for risk
management agitates for the creation of an enabling environment for risk
management by adopting the appropriate risk management strategy, human
resource capacity, and the use of the enterprise risk management framework. It also
emphasizes the need for risk identification, risk assessment, risk response,
communication and reporting, monitoring, and the key roles and responsibilities of
the risk management committees and audit committees.

The National Treasury’s (2009) Framework for Risk Management highlights that the
six main steps that influence the effectiveness of risk management in the South
African public sector include: step 1: identification of risks, step 2: analysis of causing
factors, step 3: analysis of the likelihood of occurrence, step 4: prioritisation of the
identified risks, step 5: formulation and implementation of risk response, and step 6:

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continuous evaluation of the effectiveness of the risk response. In terms of risk
identification, it emphasises that risk identification must comprise of a deliberate and
systematic effort to identify and document the institution’s key risks so as to
understand what is at risk within the context of the institution’s explicit and implicit
objectives and to generate a comprehensive inventory of risks based on the threats
and events that might prevent, degrade, delay or enhance the achievement of the
objectives (Gutto,Songca&Mothoagae, 2007:14; King, 2008:717). These legislative
frameworks provide clear processes of how financial risks can be identified and
mitigated in the modern South African public sector to leverage the overall level of
financial sustainability in the South African local municipality.

It illustrates the extent to which effective budgeting and financial planning undertaken
in conjunction with effective risks identification and mitigation can reduce financial
wastes to impact positively on financial sustainability (Department of Cooperative
Governance, 2013:13; Esmark, & Triantafillou, 2010; Gbaffou, 2007:26). As effective
budgeting and financial planning undertaken in conjunction with financial risk
management mitigate wastes, they tend to influence cost savings that create new
sources of revenues to impact on the overall increment of the municipality’s financial
reserves. However, as these financial optimisation regulations influence the
emergence of the concept of financial sustainability, the other positive impacts on the
evolution of financial sustainability have often emerged from stronger controls and
oversights exercised by different regulatory institutions (Department of Cooperative
Governance, 2013:13; Esmark, & Triantafillou, 2010; Gbaffou, 2007:26) .

 Stronger Financial Controls and Oversights Exercised by regulatory

Institutions
Stronger financial controls and oversights exercised by the regulatory institutions
have influenced the emergence and evolution of the concept of financial
sustainability in the South African local government (Atkinson, 2007; Benito
&Bastida, 2009:403). This is attributable to the fact that since 1994, an array of
different financial control and oversight bodies has been emerging to influence
evaluation of the state of expenditures in different local government institutions and
municipalities. Since the motives of these financial control and oversight bodies are
usually to identify and mitigate wastes as well as financial mismanagement causing
loss and wastes, it can be stated that the emergence of these financial control and

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oversight bodies have implicitly influenced the emergence of the concept of financial
sustainability. This is accentuated in the fact that as the significant reductions of such
wastes and financial losses tend to impact positively on the municipal cost savings
as well as the amount of financial resources that a municipality is able to accumulate
in its reserve (Atkinson, 2007; Benito &Bastida, 2009:403). In the exercise of such
stringent financial controls and oversight functions, the Municipal oversight
committees constitute some of the bodies that exercise roles.

The municipal oversight committees operate at the lowest levels of the local
government structures to ensure all municipalities undertake initiatives that leverage
the minimisation of financial wastes and losses. Such oversight roles include
checking and evaluating the extent to which the municipal authorities are performing
all functions which are critical for ensuring that all the municipal financial resources
are effectively utilised in the accomplishment of the activities for which they were
dedicated. In effect, the municipal oversight committees not only check the
effectiveness of the budget and financial planning processes, but also how
effectively are such budgets and financial plans implemented (Makhado, Masehela,
Motimele, Mokhari&Nyathela, 2012). This eliminates risks of deviating from the
prescribed plan to influence the extent to which the allocated resources are
effectively optimised.

However, the effective exercise of some of these roles is often constrained by the
poor skilfulness of the councillors that mainly constitute most of the members sitting
in the municipal oversight committees. Although such limitations affect the
effectiveness of the financial control and oversight roles exercised by the municipal
oversight committees, it is still evident that the roles and functions exercised by the
municipal oversight committees often still impact positively on cost savings and
waste’s minimisation (Makhado et al., 2012). As it is such improved level of financial
resources’ optimisation that leverages the level of the financial reserves that a
municipality has, the other significant roles undertaken towards leveraging financial
sustainability in the local government sphere has been emerging from the roles
accomplished by the Office of the Auditor’s General. Since 1994, the Office of the
Auditor-General has been performing a number of functions critical for bolstering the
level of financial optimisation in the local government sphere.

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The Office of the Auditor-General performs the monitoring functions and frequent
audit that aid the detection and mitigation of the areas of wastes. This is accentuated
in the fact that in undertaking such evaluations, the Office of the Auditor-General not
only points out areas of weaknesses, but also offers recommendations on how such
weaknesses can be addressed (Bjorkman &Svensson, 2009:735). This facilitates the
identification measures for improving the overall financial management at the
municipal level.

It is the adoption of such measures that positively change how the municipal
financial resources are managed. In the context of the literature discussed in
Chapter 2 of this thesis, improved financial management is one of the constructs that
spawn improvement of financial sustainability. Hence, it can be argued that by
constantly suggesting new measures for improving financial management, the Office
of the Auditor-General has significantly contributed to spurring the improvement of
financial sustainability in the local government sphere. The positive effects of the
Auditor-General’s functions on enhancing financial sustainability are edified by the
functions performed by SCOPA (Parliament’s Public Accounts Committee). Using
the authority vested in them by the legislature, SCOPA exercises its functions by
intervening in poorly performing public institutions to probe the causes of such poor
performance (Claasen &Lardies, 2010).

In most cases, if the reasons for poor performance are linked to poor financial
management, theft or embezzlement of public funds, it makes recommendations for
appropriate interventions to be undertaken. Due to these strong oversight roles that it
plays, SCOPA tends to deter the emergence of wastes or graft that would affect the
financial reserve of some public institutions to undermine their overall level of
financial sustainability (Binns, 2008:600; Claasen &Lardies, 2010). These roles of
SCOPA are supplemented by the functions exercised by the Public Protector, Law
Enforcement Agencies and the Anti-Corruption Pressure Groups. In other words, as
these regulatory bodies agitate for sound financial management, they tend to
influence the adoption of the financial management improvement measures that
subsequently bolster financial sustainability in the public sector. Yet, besides the
emergence of stronger financial controls and oversights exercised by the regulatory
institutions, decentralisation was also the other development that influenced the

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evolution of the concept of financial sustainability in the local government sphere
(Binns, 2008:600; Claasen &Lardies, 2010).

 Decentralisation
Decentralisation created more autonomous systems at the lower structures of the
local government sphere. This meant that the soundness of financial management of
each lower system was going to be critical for determining the extent to which they
are able to deliver critical socio-economic services to the population in their
jurisdictions (Agrawal &Ribot, 2012:9; Ahmad, Devarajan, Khemani& Shah,
2005:11). It also suggested that since the contribution from the central government is
often just to a limited extent, the generation of additional sources of revenues was a
prerequisite. In effect, decentralisation influenced the importance for the emphasis of
sound financial sustainability, if the now more decentralised systems were to fulfil
their socio-economic objectives and goals. Decentralisation refers to the process of
transferring authorities and responsibilities from top management to the lower
structures.

Decentralisation can be structural, decisional, resource decentralisation, electoral

and institutional. Structural decentralisation connotes the process through which
relevant policies and legislations are adopted to create relevant structures and
administrative framework through which administrative responsibilities and powers
can be passed to the lower structures. Quite often, the failures of certain
decentralisation initiatives arise from lack of transfer of powers and mandates from
the central government to the lower structures. However, through decisional
decentralisation, the process of decentralisation does not only entail the creation of
relevant structural frameworks, but also transfer of powers and authorities to
conclude certain critical decisions (Bahl& Martinez-Vazquez, 2006;
Bardhan&Mookherjee, 2006). This eases the burden placed on the usually already
burdened central government. Resource decentralisation on the other hand
connotes the process through which the decision to determine the amount of the
required financial and non-financial resources are transferred to the lower structures.

In such cases, the lower level directors and managers are granted the mandate to
make decisions on how to generate the require resources and decide on how it can
be allocated and spent on the implementation of different government programmes

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and projects(Eaton, Kaiser & Smoke, 2011:8; Falleti, 2013:140; Falleti, 2005:327;
Gervasoni, 2010:302). This implies the overall effectiveness of financial sustainability
at this level may also influence the effectiveness of resource decentralisation. Failure
to effectively manage the existing resources or to generate new sources of financial
revenues causes situations where the decentralised system perennially depends on
the grants from the central system. The emergence of such a situation suggests the
decentralised autonomous system is not financially sustainable (Cheema
&Rondinelli, 2007; Connerley, Eaton & Smoke, 2010; DeLoG, 2011). On the other
hand, electoral decentralisation offers a framework through which the local
authorities are granted the authority and responsibility to conduct and elect their
representatives to the national spheres of government. Institutional decentralisation
is a process through which the local communities and authorities are legislatively
accorded rights in the central decision making system.

However, most authors argue that for decentralisation to enhance the attainment of
the desired strategic objectives and goals, it must be accompanied by necessary
change and civil service reforms. In these reforms, it is critical for government to
create necessary conditions and frameworks that permit local authorities to execute
the desired responsibilities and mandate. This implies that capacity building and
improvement must comprise part of the critical activities to be undertaken (Robinson,
2007:2; Robinson, 2007:7; World Bank, 2008:5; Yang & Pandey, 2011:880).

Capacity building edifies the improvement of the competencies of the directors,

managers and employees at the local government and community levels (Manor,
1998:7; Martinez-Vazquez &Vaillancourt, 2011; Packel, 2008:16). Quite often, the
challenge of ensuring effective implementation of different programmes in a
decentralised system is the failure of the lower level managers to apply necessary
skills and competencies to design, formulate and implement different local
government programmes. In effect, even where full scale decentralisation was
intended, it tends to only take the form of structural decentralisation rather than a
combination of the decisional and structural decentralisation. This is often
undertaken to ensure that as much as decentralisation is encouraged, the central
government still remains supportive of directors, managers and employees in the
local government structures.

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To avoid such initiatives, the process of decentralisation is often accompanied by
training and developing the competencies and capacity of the lower level managers,
directors and employees (Ahmad, Devarajan, Khemani& Shah, 2005). This is further
accompanied by the initiatives of ensuring that necessary resources are allocated for
the implementation of all critical government programmes. All these can impact
positively on the improvement local government efficiency and the improvement of
the effectiveness of the process of service delivery.

It is on that basis that decentralisation may require the lower decentralised structures
to adopt better approaches for financial sustainability in order for such decentralised
systems to be sustainable. In other words, following the decentralisation of the South
African public sector and the promulgation of the Batho Pele “People First”
Principles, structural endeavours have been created not only in the establishment of
ward committees, but also to influence the extent to which the communities within
wards are able to be consulted and involved in the planning and implementation of
different community development programmes.

At the municipal levels, critical strategies that are used include; monthly meetings,
mayoral imbizos, people’s assemblies, public suggestion boxes, press releases,
sectoral meetings, IDP meetings, road shows and ward committee meetings
(Ahmad, Devarajan, Khemani& Shah, 2005). In a bid to ensure that everyone is
informed of the events in the municipalities and the progresses so far achieved in the
implementation of different community development programmes, municipalities are
also required to print and distribute monthly newsletters through councillors, ward
committees and the municipality’s satellite offices. In other words, councillors and
ward committees are the mechanisms that link the communities with the
municipalities.

However, over time, empirical research has established that the effective utilisation
of councillors is still undermined by mere delegation and not decentralisation of
authority to councillors and ward committees (Manor, 1998:7; Martinez-Vazquez
&Vaillancourt, 2011; Packel, 2008:16). Councillors are the elected representatives of
wards who are required to represent and liaise with their municipalities to ensure that
effective implementation of development programmes. However, the capacity of
councillors and ward committees has not been strengthened to ensure that they are

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able to initiate and implement programmes that are tailored to certain unique
challenges that the communities in their wards face. This undermines the overall
process for the improvement of the conditions and standards of living of the
communities (Bland, 2010:47; Boex, 2011:3; Faguet, 2014:2; Faguet, 2009:29).

Decentralisation seems to have not reached ward levels. In decentralized ward

structures, wards must be able to not only liaise with municipalities, but also to
initiate and finance own projects using resources allocated to specific wards. Such
an autonomous status would enable wards aid municipalities resolve certain service
delivery backlogs at community levels. Unfortunately, at ward level, authorities and
responsibilities for service delivery seem to have only been delegated rather than
decentralized to the ward levels. At the same time, the extent to which the
improvement of the capacity of ward committees and councillors is still undermined
is reflected in the fact that most of the councillors lack relevant skills, as their
elections is not only politically based, but also limited to basic level of competency in
literacy and ability to read and interpret documents to the communities. Such
constraints affect the development of financially sustainable municipalities (Bland,
2010:47; Boex, 2011:3; Faguet, 2014:2; Faguet, 2009:29).

5.3 FINANCIAL SUSTAINABILITY MODELS AND METHODS USED BY THE

DIRECTORS AND MANAGERS IN THE SOUTH AFRICAN LOCAL
GOVERNMENT
Financial sustainability models and methods used by the directors and managers in
the South African local government include Central Financial Grant System,
SALGA’s Model for Financial Sustainability, Investment in Revenue-generating
Activities and Managing Municipal Operational Efficiency as a Driver of Cost
Minimisation. The details of these models and methods are examined below.

 Central Financial Grant System

Central financial grant system offers one of the sources of funds for financing the
administration of the municipalities as well as the developmental functions of the
municipalities. Section 151(3) of the 1996 Constitution of the Republic of South
Africa requires municipalities to constitute relevant structures which are not only
critical for their effective management and administration, but also for the delivery of
critical socio-economic services. Such socio-economic services include education,

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health, water and sanitation and infrastructure essential for improving the
attractiveness of the municipality’s environment. The other functions are linked to
assisting low income households to access basic services, sustaining the
municipality’s operation, training and developing the capacities of the officials to run
the municipality more efficiently. However, to accomplish these, funds provided by
the central government remains the major source funds for sustainably delivering on
such functions.

The funds provided by the central financial grant system is in line with the provision
of Section 227 of the 1996 Constitution of the Republic of South Africa that
prescribes that every municipality is entitled to the share of national revenue so that
they can be able to effectively accomplish their various socio-economic services.
However, as such funds are being offered, the Division of Revenue Ac 2005 requires
such funds to be equitably distributed by national, provincial and local government.
In effect, the amount that each municipality obtains from the central grant system
depends on the amount of funds that it collects from its own sources. This implies
that relatively poor municipalities with limited sources of revenue tend to get more
funds as compared to the municipalities in richer economic regions that tend to draw
a lot of revenues from their own sources. In addition to the amount of funds raised
from own sources, the other determinants of the amount of funds allocated to each
municipality are often linked to the low revenue municipality’s population size, the
cost of basic services and the extent to which the overall required expenditure of the
municipality exceed its revenues.

In the disbursement of relevant grants to the nine provinces and the 257
municipalities, the common types of grants that are offered include municipal
infrastructure grants (MIG), municipal urban settlements development grants,
municipal water infrastructure grant, national electrification programme grant,
municipal capacity building grant and rural households infrastructure grant. The
provision of municipal infrastructure grant is determined by the number of
households without access to basic services such as water and sanitation services
as well as electricity, service delivery backlog in each municipality and the national
proportion of poor households located in each municipality. Municipal urban
settlement development grants are offered to the eight metropolitan municipalities for

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the purpose of financing critical infrastructures as well as upgrade of urban informal
settlements in their jurisdictions.

Whereas municipal water infrastructure grant offers funds for fast tracking the
delivery of clean water to the communities without access to basic services, national
electrification programme grant offers funding for electricity extension to rural
households. These contrast with municipal capacity building grant which is provided
for financing training and skills development for management, planning, technical,
budgeting and financial management matters. Rural households’ infrastructure grant
provides funding for extension of sanitation services to areas where pipe
infrastructure has not been provided. The other grants that are also provided by the
central financial grant system include integrated city development grant, municipal
demarcation transition grant, energy efficiency and demand side management grant,
disaster recovery grant, development partnership grant, rural roads’ asset
management grant and indirect transfers that are paid to a public entity or a national
department to deliver services on behalf of a municipality that has turned
dysfunctional.

These grants from the central finance system are supplemented by the revenues
raised by each municipality from its own source. This is in context of Section 229 of
the 1996 Constitution of the Republic of South Africa that requires a municipality to
impose property taxes, service charges and fines. In line with the provision of the
Municipal Property Rates Act, each municipality can impose property taxes on
residential, industrial, commercial, formal and informal properties located in its
jurisdiction. Municipalities can also charge for services such as electricity, water,
refusal removal and use of facilities such as recreational centres and sports grounds.
In terms of its bylaws, a municipality can also impose fines such as traffic fines,
penalties for bylaws’ contravention and penalties for overdue payment of service
charges.

Although these different sources of revenues offer funds for the implementation of
different municipal socio-economic programmes, they are not sustainable. This is
attributable to the fact that whereas funding from the national system can easily be
affected by the overall sudden failure of the economic systems of the country, some
of the municipal sources of revenues such as fines and penalties keep on fluctuating.

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However, it is also not the main objective of the municipality that people must keep
on breaching its bylaws so that it can obtain revenues through fines. This implies
direct investments in commercial activities such as the development of the municipal
commercial and residential properties would leverage the overall certainty of the
inflows of relevant revenues to impact positively on the overall level of municipal
financial sustainability.

However, to enhance the optimisation of the existing sources of revenues to

enhance the meeting of the needs of the resent generations as well as the future
generations, the Municipal Finance Management Act 2003 and Section 153 of the
1996 Constitution of the Republic of South Africa require municipalities to structure
their administration and management in the way that bolsters the optimisation of the
limited resources to leverage the offering of as enormous socio-economic services
as possible. The Municipal Finance Management Act 2003 agitates for sound and
sustainable financial management by requiring municipalities to establish standards
and requirements for managing revenues, expenditure, assets and liabilities,
budgeting and financial planning process, borrowing and debt financing, handling
financial problems and ensuring transparency and accountability in the management
of the municipal finances. It also agitates for effective management of the financial
management cycles that entail planning and budgeting, implementation, monitoring,
evaluation and reporting.

However, while using the traditional model of financing different developmental

activities, some of the municipalities also tend to rely on borrowing. Borrowing is
often undertaken into two main forms with the first being the direct borrowing by the
municipalities from the local financial institutions. In this process, the municipalities
tend to request for either overdrafts from the commercial banks or to borrow directly
against the mortgaged assets. In most of the cases, considering that most of the
municipalities struggle to meet their development needs, borrowing from the banks
has often been useful for enabling municipalities meet their financial obligations.

Nonetheless, in the wake of the increasing demands of the population that the
municipalities have got to respond to, borrowing is often not adequate and
sustainable source of funding of the municipal development programmes. In most of
the cases, loans borrowed from commercial banks whether it is overdrafts or direct

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loans against the mortgaged securities, risks often still tend to arise from the fact that
the loans have to be repaid. Conversely, considering that most municipalities
struggle financially, it is often not easy to repay such loans even if the borrowed
funds are utilised more effectively and properly. This is attributable to the low
revenue collections in certain municipalities and some of the intervening factors such
as community riots about poor service delivery in certain cases. This usually causes
a shift of attention and resources to such areas, thereby implying in the long run,
borrowed funds tend to be insufficient, yet, the municipality must still meet its
repayment obligations. In other words, this implies that complexities may tend to
arise with the effect that unless innovative financial management approaches are
developed to deal with such circumstances, some of the municipalities often find
themselves thrown into receivership.

Although the situation is constantly changing, in the past, some of the municipalities
have ended up in liquidations and receivership due to borrowing undertaken without
exploring how such borrowed funds and the associated interests would be repaid.
Quite often, it is the emergence of such circumstances that affect the development of
financially sustainable municipalities. However, if the municipalities are not financing
their development projects using loans from commercial banks, they may depend on
the funds borrowed by the central government. In these forms of borrowing, funds
are often borrowed from the International Monetary Fund or the other development
partners such as the United Nations Development Funds. Considering the fact that
just like municipalities, central governments are also often over burdened by the
pressure from the population, the availability of such loans facilities has often been of
essence for aiding the government advance the required funds to the municipalities.

However, following the over-indebtedness of the government to the tune of R170.5

billion, the government is increasingly reducing on the rate of borrowing from thee
external sources. That implies the municipalities will have to look internally to assess
the extent to which economic activities can be boosted to boost revenue streams
from taxation. Besides borrowing, some of the municipalities tend to also generate
funds from the sale of old or redundant assets such as buildings, cars, computers or
machines. To some extent, the use of a combination of these traditional financing
mechanisms leverages the extent to which the municipalities are able to meet their
day-to-day financial obligations. Besides the financing model offered by the central

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financial grant system, the other model that also seeks to leverage financial
sustainability of the local municipality is also provided by SALGA’s (South African
Local Government Association) model for financial sustainability.

 SALGA’s Model for Financial Sustainability

The establishment of SALGA is in line with Section 163 of the Constitution of the
Republic of South Africa that requires and recognises structured and organised local
government bodies as critical for voicing the concerns of local government in
different areas. To accomplish this, SALGA has created a framework through which
it mobilises for resources critical for accomplishment of its different functions.
Besides recognition and its representation in the Financial and Fiscal Commission,
SALGA is also listed under schedule 3A as a public entity in terms of the Public
Finance Management Act. SALGA’s main functions encompass representing,
promoting and protecting the interests of local government, enhancing the roles and
status of municipalities, representing the 257 municipalities in key Intergovernmental
Relations structures at the provincial and national level and positioning local
government at the centre of cooperative governance and development.

The other functions of SALGA are linked to deepening democracy and accountability
at the local level, optimizing governance systems within municipalities, developing
common approaches for local government as a distinct sphere of government,
enhancing co-operation, mutual assistance and resource sharing among
municipalities and leading the transformation of local government as a
developmental local government. To enhance the development of local government,
SALGA has designated 10 key priority outcomes that it strives to achieve. These ten
key priority outcomes include: councillor support, service delivery, social cohesion,
economic development, labour relations, sound financial management and
governance system. Its other key priority outcomes encompass stable municipal
governance, capacity building and institutional development, reform of organised
local government and undertaking climate change enhancing measures at the
municipal level.

To achieve these key outcomes, SALGA has developed a funding model that draws
its funding from sources such as membership fees, government grants, donations
and sponsorships. Membership fees are drawn from local municipalities and

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constitutes of 0.5% of the total salaries and allowances budget. It also draws
membership fees from district municipalities and constitutes 0.6% of the total salary
and allowances budget, as contrast to all the metropolitan municipalities that pay a
flat fee of ZAR 9.1 million. Grants from government are provided by the Ministry of
Cooperative Governance and Traditional Affairs (CoGTA). Although donations are
other sources of SALGA funds, their sustainability has been affected by the fact that
since 2002 donations to SALGA has significantly reduced. This, however, contrasts
with sponsorships, where through holding various constitutional events and public
activities each year, SALGA has been able to attract a lot of support through
sponsorships. Besides these sources of funding, SALGA does not engage in the
investment of any income generating activities. This renders most of its sources
unsustainable. However, besides such a limitation, SALGA still engages in the
initiation and facilitation of development programmes that aim to improvement the
overall attractiveness of most municipalities. This is latent in the fact that it has been
at the forefront of the facilitation of the process for the implementation of local
government turnaround strategy.

Local government turnaround strategy aims to boost investment environments of

different municipalities by undertaking asset replenishment and maintenance across
all the municipalities as well as reduction of infrastructure backlogs. SALGA
advocates for a developmental local government oriented approach. As the local
municipality turns developmental oriented, it also influences the importance for the
local municipality to be financially sustainable to ensure that all its developmental
programmes are successfully implemented. Considering the challenges that most of
the municipalities were facing, the local government had to turn to be developmental
as a strategy for responding to the needs and demands of the population. In this
process, local municipality had to analyse and interpret the unfolding trends in order
to discern how to respond to the new changes before even they occur by developing
new innovative projects. As this analysis was being undertaken, local municipality
had to change its structures to ensure the efficient flow of activities and service
delivery to the local population.

Certainly, improved efficiency of the process of service delivery influenced cost

reduction and cost savings that subsequently impacted on the optimisation of the
limited financial resources to finance as an array of different developmental projects

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as possible. To aid the achievement of the development goals of the local
municipality, restructuring had to be undertaken. Whilst undertaking a
decentralization approach, restructuring led to the introduction of the ward
committees, integrated development planning, municipal budgets and finance and
municipal service delivery systems. All these drove the local municipality to engage
in different quests for improving financial sustainability to ensure that all the
developmental programmes are successfully and sustainable implemented to
minimise risks of failures and wastes of resources of such failures occur.

However, as local government strove to leverage its financial sustainability so as to

influence the achievement of its developmental outcomes, it is not only the financial
sustainability that may influence the successful implementation of different
developmental programmes, but also other factors. In this process, some of the
other factors are linked to democratization and involvement of the communities,
effective planning, performance measurement and evaluation. Lack of
democratization through the involvement of the relevant stakeholders and
communities in the design and implementation of different developmental
programmes can cause sabotage. Sabotage can cause lack of full cooperation that,
in turn, can be costly to reverse. This implies that unless relevant stakeholders are
involved and consulted quests for cost reductions to leverage optimisation of the
existing resources may tend to get marred by lack disagreements and conflicts.

As much as integrated development planning leverage minimisation of project

failures, it also drives the quest for financial sustainability. This is attributable to the
fact that integrated development planning agitates for long-term planning and
implementation of different municipal programmes. To ensure that these long-term
projects are successfully implemented, it may also require the development of a
more financially sustainable local government system and municipality. Besides the
change demands and needs of the population as well as the emergence of the
concept of a developmental local government, the need for regulatory compliance
was also one of the other strong drivers of the emphasis of financial sustainability in
the contemporary local municipality. These roles are being supplemented by critical
roles played by the central government to boost the attractiveness of the overall
investment environments across the country.

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 Investment in Revenue-generating Activities
Local government has also been significantly encouraging the local municipalities
and municipalities to invest in the income generating activities and projects. This is
attributable to the fact that the increasing dependence of the local municipalities and
the municipalities on the donations and grants from the central government is
increasingly turning to be unreliable and sustainable. The implications are latent in
the fact that instead central government is encouraging municipalities to invest in
new sources of revenues. Of recent, local government has been investing in the
development of more effective local economic development departments in every
municipality. The roles of these local economic development departments are to
conceptualise and develop new revenue generating projects on which significant
investments can be committed to spur and stimulate the development of the sources
of revenues through taxes. This is accentuated in the fact that increasingly,
municipalities are being required to be innovative and developmental to initiate and
develop new revenue generating projects. This is because the expenditures of the
central government department are too large to the extent that even if grants are
made available to the municipalities, quite often, such funds have not been
adequate. At the same time, the government is over-indebted with the effect that by
the year of 2016/2017, the estimated deficit is 170.5billion.

With this high level of indebtedness, the government is reducing its borrowing rate to
imply that the municipalities must look internally for the sources of revenues. To
accomplish this, some of the municipalities have been developing policies and
strategies that isolate programmes and projects in the key command sectors of the
municipal economies such as manufacturing, agriculture and tourism. In terms of
improving the manufacturing base of the municipalities, the municipal Strategic
Policy Analysis and Research Department often focus on researching and analysing
emerging data and trends on how the manufacturing base can be expanded to not
only create jobs, but also to boost economic activities that would, in turn, expand on
the taxable base and the sources of revenues.

To stimulate manufacturing, some of the municipalities have been conducting

research that would lead to the development of a model for the creation of industrial
zones in which the small factories and cottage manufacturing firms involved in the
manufacturing of products such as fruit juice, beef, dairy products and other agro-

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processing factories will be encouraged to establish. Further research is also being
undertaken to determine the incentives that can be developed to stimulate the
proliferations of the required number of factories into such zones. The improvement
of the performance of the manufacturing sector will certainly spur increment of the
source of revenue, employment opportunities and productivity of the agricultural
sector that will act as the source of inputs to the agro-processing plants.

Research and development of a model through which the communities can be more
encouraged and involved in large and small scale commercial agricultural activities
such as cattle keeping for dairy or beef purposes, goat keeping or other forms of
modern agricultural activities are presently being undertaken. This will be
accompanied by the research on the models that would improve collaboration and
transfer of skills from the large established commercial farmers to the emerging
commercial farmers. On the other hand, the municipal strategic policy analysis and
research are also being undertaken to assess the strategies through which tourism
can be catalysed as one of the municipalities’ critical economic growth trajectories.
This is attributable to the fact that most rural municipalities are already well endowed
with enormous virgin and unexploited tourism potentials.

As the municipalities identify key sectors of their economies that investments can be
committed to spur growth and create alternative sources of revenues, some of the
municipalities have also been significantly investing in the security and the
development of the appropriate investment policies to create favourable investment
environments that would significantly influence the attraction of trade and commerce
to boost the sources of taxes and revenues for the government and the
municipalities. The development of favourable investment conditions are also often
accompanied by aggressive marketing campaigns to market municipalities to
businesses around the country and abroad. This influences the improvement of the
positive perceptions that businesses and the investment communities have about the
municipalities. It is through such aggressive marketing campaigns that the
municipalities are able to attract new businesses and boost the economic activities in
their jurisdictions to spur the overall improvement of revenues collected from taxes.

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 Managing Municipal Operational Efficiency as a Driver of Cost
Minimisation
To leverage cost savings and create extra financial resources, most of the
municipalities have been engaging in efficiency improvement as strategies for cost
minimisation to unlock enormous cost savings. Through these cost savings,
municipalities would be able to eliminate wastes and leverage their overall financial
bottom-lines to tackle other challenges. In this process, the starting points for most of
the municipalities have often entailed the development of an appropriate municipal
integrated development plan. This is attributable to the fact that the use of the
appropriate integrated municipal development plan enables municipalities conduct
relevant analysis so as to identify critical areas of priorities that the attention must be
directed. As areas of priorities are identified, it becomes easier for the municipalities
to direct most of the resources to the areas that the customers value most. This
enhances waste minimisation on the basis that resources are not wasted on the
areas that the populations do not attach much significant importance.

In the process of accomplishing this, it is not only the municipal integrated

development plan which is the major determinant and guide of the process of
resource allocation. Instead, some of the municipalities often emphasis that basing
on the key areas highlighted in the integrated development plan that an appropriate
budgeting process is undertaken. The use of an appropriate budgeting process
improves the process of resource allocation to minimise the overall risks of resource
wastage. Subsequently, save costs occur in all areas, it subsequently translates into
the improved financial capabilities of the municipalities to not only respond to their
existing financial obligations, but also the emerging future financial obligations.
However, as most of the municipalities tend to rely on the effectiveness of the
integrated development plan and budgeting, some of the municipalities are also
increasingly adopting a lean operational approach as a driver of cost minimisation. In
this process, municipalities tend to maintain a lean system, a lean human resource
and constant cost evaluation to enhance minimisation of wastes. Part of the process
for the development of a lean municipal system has been reflected in the
establishment of e-government. This is accentuated in the fact that the department of
local government has made significant investments in the development of e-

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government as part of the innovative initiatives to lower costs and leverage the cost
saving capabilities of the municipalities.
Through e-government, the department of local government would be able to
combine different services and lower costs of human resource management and
deployment (Segole, 2015:5; Sharma, Guttoo&Ogra, 2014:18; TIBCO, 2015:6). This
is attributable to the argument that using internet, the department of local
government would be able to offer an array of online services to thereby not only
lowering the human resource costs, but also the costs of managing extensive
structures. The other positive effects of e-government on the reduction of the
operational costs for the local municipality have been reflected in the reduction of the
costs of data management (Vincent, 2014:19; Weaver, 2009:10; Western Cape
Government, 2012:19). This is attributable to the fact that considering that the
provision of online services completely eliminates voluminous paperwork from
different transactions, the implications would be reflected in the reduction of the
enormous costs that are often incurred in the purchase of stationery.

As all the activities and transactions are transferred online, it often becomes easier
for the government to monitor and evaluate the effectiveness of the process for the
implementation of different programmes. This not only lowers the cost of monitoring
and evaluation, but also the reduction of the risks of project failures. The reduction of
the risks of project failures also minimises risks of resource wastage for the reason
that as activities are intensely evaluated online, it tends to enhance early
interventions to ensure that all the programmes are successfully implemented.
Project failures not only cause wastes, additional expenditures to correct the failures
(PricewaterhouseCoopers-PwC, 2013:14; Sandeep, Seng & Wu, 2015:438).
Such a view implies that the far-reaching effects of the implementation of e-
government may also be not only be reflected in the immediate cost savings, but
also cost savings and reduction of wastes resulting from the improved capabilities of
the municipalities to virtually monitor activities and reduce the risks of project
failures. Through such extensive cost savings that the department of local
government is able to save and accumulate enormous financial reserves that would
be used for financing other activities. To achieve some of these values of e-
government, the government has already made significant strides towards the
investment in e-government.

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At the national sphere that also impact on the operational efficiency of the local
municipality, this initiative has been reflected in the development and establishment
of the National Treasury e-Tender Publication Portal, a central supplier database, e-
home affairs and the South African Revenue Services’ e-filing systems (Misra,
2010:3; Mkhize, 2014:19;Mkhize, 2015:5). While at the local government sphere,
significant efforts have been committed on the development and establishment of the
Gauteng’s e-invoicing services, the City of Ekurhuleni’s online system for paying
rates, and the City of Cape Town’s digitization of the government information system
to enable easy access by the citizens. In a bid to further enhance the development
and establishment of e-government; most of the metropolitan municipalities such as
the City of Johannesburg and the City of Tshwane have been significantly also
invested in the establishment of free Wi-Fi (O'Neill, 2009:751; Optus, 2015:9;
Pickworth, 2013:5). This is attributable to the fact that the department of local
government recognises that even if it goes online, the impact on the improvement of
the efficiency of service delivery would only be minimal unless a significant section of
the population has access to the internet.

In effect, the establishment of e-government is being accompanied by the

establishment of free Wi-Fi in all the municipalities (Mpinganjira, 2014:129; Mutula,
2013:59; Mutula&Mostert, 2011:38). Although at presently the focus is directed on
the metropolitan municipalities, in the near future, it is anticipated that the process
will also lead to extending free Wi-Fi to the rural municipalities to ensure that with
time, all the country is integrated through free Wi-Fi. It is at that point that local
government expects to realize enormous cost savings that would in turn also
influence the improvement of its financial sustainability.
However, even if enormous positive impacts are being realised, it seems the
application of internet technologies has only been successful in the urban areas. In
the rural areas, poor connectivity to the internet has been a hindrance. Enormous
costs required for investment in relevant IT infrastructures and software such as
VSAT, MAP, HAP and WiMAX have made the government only focus on a few
areas. The roll-out of free Wi-Fi is going on. However, the major focus is still largely
in the major cities and municipalities (Department of Communications, 2005; Kaisara
& Pather, 2009:18; KPMG, 2011:5). Although the use of public internet cafes has
been able to fill such a gap, frequent power and energy shortages has also been a

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hindrance. Even in instances where the population are able to access the internet,
the simple processes and steps required for accessing different public services
through the internet are still often been challenging for the rural population that are
largely illiterate(Marson, 2014:19; Maumbe&Owei, 2011:10).
This affects the overall application of the internet in the facilitation of the
implementation of an e-government system as a driver for cost minimisation and
financial sustainability.
It is not only the rate of illiteracy which is affecting the use of the internet, but also
poverty (Akther, Onishi&Kidokoro, 2007:38; Abdalla, Karanja&Adhiambo, 2015:102).
Most South African government departments and municipalities have developed
multichannel service delivery involving the use of e-mails, SMS, faxes, telephones
and cell phones. However, abject poverty among most rural population implies that
most service users are unable to access certain services. Telephones costs as well
as sms costs remain quite high for most of the rural population. All these limit the use
of the internet in the rural areas. Content development is one of the areas posing
challenges to the use of technology as a strategy for enhancing effectiveness of e-
government. This is accentuated in the fact that lack of skills and required specialists
are still affecting the operationalisation of m-government.
Besides lower bandwidth and the small screen nature of mobile technologies,
successful development of an m-government requires appropriate skills and
expertise. In effect, most e-government contents are not supportive towards the
creation of an ideal m-government (Kwandayi&Ikobe, 2013:9; Lennon, Maguire &
Lai, 2014:14). This also affects the use of m-governance as a predictor for effective
e-government. On the other hand, differences in languages also undermine the
creation of a coherent system and the use of the system by the population segments
that are not familiar with the language used. Unless the importance of content
development in all the eleven languages is recognised by policies, the use of m-
government may still not influence the overall effectiveness of the e-government
system. Nonetheless, it still evident that investment in e-government is one of the
innovative initiatives that have been adopted by the department of local government
to lower costs of local government operation, so as to subsequently bolster its
financial sustainability(Bourgon, 2007:11; Farelo & Morris, 2006:5).

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5.4 Inhibitors of initiatives for improving financial sustainability in the South
African local government
Major inhibitors of the initiatives for improving financial sustainability in the South
African local government often arise from inadequate municipal capacity, limited
income generating activities, deficient local government procurement system and
poor leadership and governance. The details of these limitations are evaluated as
follows.

5.4.1 Inadequate Municipal Capacity

Some of the challenges affecting the improvement of the financial sustainability of
most of the municipalities are often linked to the failure to create a strategic fit
between the municipal capabilities and the constantly changing socio-economic
trends (Khumalo&Mkhululi, 2016:3). Yet, contemporary South African societies are
constantly changing politically, economically and socially at the level that the
municipalities cannot easily match. Some of these forces are linked to changes in
the political set up that can cause the introduction of new ideologies and beliefs.
These new ideologies and beliefs can cause the introduction of new systems and
thinking as well as policy that do not influence municipalities to engage in
constructive activities.

In this process, the politicisation of certain minor failures and challenges of the
municipalities have often caused service delivery riots and strikes that have
paralysed the effective performance of the municipalities. Some of these strikes and
riots even cause damage on the assets of the municipalities. Quite often, these
cause the municipalities to have to re-plan how to fix such damages using funds that
could have been used for some other purposes (Slabbert, 2016:16). It is not only the
emergences of such circumstances that cause situations that undermine the drive for
improving the municipal financial sustainability, but also the fact that as such
challenges occur, most of the municipalities are rendered redundant. This affects the
extent to which the municipalities are able to design and complete different
development and revenue-generating projects on time. To avoid the frequent
emergence of such political scenarios, it is often important to constantly analyse and
sense the probability of the emergence of such risks and development of contingent
plans to deal with such challenges when they emerge (Mahabir&Mabena, 2015:6).
Although it is often easier to identify and detect the symptoms of such volatile

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political changes, it is habitual for the municipalities to avert all of them. In other
words, this demonstrates the extent to which the emerging new political changes and
trends can cause the emergence of new situations that affect the capabilities of most
of the municipalities to effectively deal with such new trends and dynamics.

However, it is not only changes in the political trends and dynamics that affect the
capabilities of the municipalities to deal with, but also certain economic changes
(Mahabir&Mabena, 2015:6). Changes in the population demographics can cause
situations that render it difficult for the municipalities to effectively respond to the
emerging changes in the demand of the population using only the available existing
resources. As the municipalities struggle with how to respond to the fast increasing
changes in the population dynamics, changes in other economic variables such as
the emergence of inflationary situations and changes in interest rates can induce
new circumstances and situations that render it difficult for the municipalities to use
the existing financial resources to finance an array of the previously planned required
activities (Slabbert, 2016:16).

This is attributable to the fact that the emergence of inflationary situations can cause
changes in the prices of inputs and materials being used in a particular project. Even
if previously contingent financial plans had been put in place to handle such
changes, the negative effects of such changes in prices still consume a lot of
financial resources that the municipality could have used for other development and
revenue generating activities. Yet, as the rand also depreciate against the dollar,
most of the municipalities that import certain items also tend to be affected. In the
long run, this affects the undertaking of cost saving innovative initiatives that
optimise the existing financial resources to leverage the overall improvement of the
municipal financial sustainability. Such changes are further exacerbated by the
changes in the global trends arising from globalisation influencing changes in the
demands and expectations of the population. Even if these can affect the capabilities
of the municipalities to respond to such unfolding dynamics, in most cases, it is not
only the difficulty of the municipalities to respond to the unfolding changes that
affects improvement of municipal financial sustainability, but also the challenge of
poor municipal capacity.

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Inadequate municipal capabilities are the other factors affecting the drive to leverage
the financial sustainability of the municipalities. Most municipalities struggle to
operate sustainably (Madonsela, 2013:9). This is attributable to the fact that most
municipalities in the countryside struggle with the challenge of attracting and
retaining the most skilful employees. The implications are latent in the fact that some
of the municipalities end up operating without properly functional departments or
certain critical units. Even though drive to leverage cost minimisation is often
undertaken by sharing the responsibilities and duties of the unfilled vacancies, in
most of the cases, the negative drawbacks tend to easily emerge from the rise in the
work overload on the existing municipal staffs and managers. This affects effective
accomplishment of existing activities as well as monitoring and evaluation to aid
identification and elimination of risks that may cause waste to, in turn, affect the
municipality’s drive to gain financial sustainability (Schoeman, 2011:4).

As the municipalities face capacity constraints, the implications are latent in the fact
that most activities of the municipalities are outsourced. Even though outsourcing
eases work overload on existing managers, in the end, it is usually quite expensive.
This is attributable to the fact that consultants charge exorbitant fees that erode the
overall financial bottom-line of the municipalities. This is exacerbated by the fact that
in most of the cases, the process for the evaluations of the decisions to outsource or
not to outsource are not effectively evaluated in considerations of the cost that the
municipality will have to incur as compared to if such activities were accomplished
internally (Schoeman, 2011:4). Quite often, the higher fees paid in outsourcing
contracts are attributable to the quality of the experts engaged in the outsourcing
contracts.

Even though it seems outsourcing decisions are guided by the predictions of the
extent to which it would enable municipalities achieve the desired quality outcomes,
the drawbacks seem to have been reflected in the erosion of the financial strengths
of some of the municipalities (Ramokgopa, 2016:3). As one the other hand, some of
the challenges of limited required skills in the municipalities also affect planning and
prioritization of key areas on which more financial resources must be committed.
This affects resource optimisation to subsequently affect the overall financial
sustainability of the municipalities.

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However, as the municipalities struggle with the challenge of inadequate capacities,
problems also often arise from the over-reliance of the municipalities on central
government grants. Most municipalities face the challenge of having to finance an
array of needs ranging from primary healthcare, education, infrastructure, water and
sanitation and security needs that keep on changing from one time to another
(Ramokgopa, 2016:3). However, these complex changes in socio-economic needs
have often not been accompanied by the increment in the sources of revenues that
can be used to finance such an array of relatively complex financial needs. This is
echoed in the fact that although the funds granted by the government are often
enormous, the challenges faced by the municipalities are often also enormous. New
changes keep on emerging, as the existing challenges turn complex. This renders it
difficult for the municipalities to adopt effective financial control strategies that would
leverage their financial sustainability.

Instead, trends indicate that in most of the cases, where municipalities have adopted
a combination of cost minimisation strategies, sudden changes tend to emerge
(KPMG, 2014:6). As the municipalities strive to respond and thwart such challenges,
they tend to use all that was left in the financial reserves, thereby leaving most of the
municipalities in vicious cycle of financial incapability which, in turn, affects their
financial sustainability. This signifies the challenges of the municipalities regarding
not just how to optimise the limited financial resources, but how to generate new
sources of revenue (Palmer, 2011:5). Common sources of revenue and finances of
the municipalities are usually the central government grants, donations and financial
resources obtained from the strategic partnerships and alliances between the
municipalities and the private sector organisations or non-governmental
organisations. Although these sources provide revenue through which most of the
local government activities are financed, in most cases, they are unreliable, thereby
rendering it difficult for the municipalities to meet some of their financial obligations
(Palmer, 2011:5).

5.4.2 Limited Income Generating Activities

As much as most of government policies and legislations emphasise the importance
for effective financial management in the local government sphere, only limited
emphasis seems to have been placed on the generation of additional sources of
revenues. This limits the generation of additional revenues that can be used to

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finance different government socio-economic projects. However, it is the
fundamental argument in the financial sustainability literature that financial
sustainability of a government department depends on the availability of different
sources of funds (Khumalo&Mkhululi, 2016:3). That implies reliance on only a few
sources of income for the government department to undermine the extent to which
it can be sustainable in the future. It is, therefore, critical for government departments
to become more creative and innovative in the development and implementation of a
combination of different innovative programmes that generate incomes. Some of the
major sources of government incomes are often linked to revenue collected in the
form of taxes. In other words, taxes are the common sources of government revenue
(Findley &Ogbu, 2011:19).

However, considering the increase in the service provision initiatives and

government programmes that must be financed, sole reliance on taxes as the major
source of incomes is often the major causes of why most of the government
departments are not financially sustainable. For government departments to be
sustainable, sources of income must span across taxes to encompass development
of services and products that can be sold to the communities. However due to the
emphasis of the developmental state approach to governance, most of the socio-
economic services such as education and healthcare are offered for free to the
citizens. The provision of these services for free, even after 20 years of
independence, places significant financial burden on the state (Findley &Ogbu,
2011:19).

Even if the local municipality was to place significant emphasis on revenue

generation, it seems only the metropolitan municipalities would be able to identify
new sources from which revenues can be generating. This is attributable to the fact
that most of rural local municipalities are less productive municipalities because of
low economic activities. This low level of economic activities is further affected by
limited investments in the economic activities such as agriculture and tourism
activities that are often suitable for rural areas (Schoeman, 2011:4).

Limited investments in the promotion of socio-economic activities such as agriculture

and tourism is caused by the fact that considering the limited funds that local
municipalities receive from central government, most of them are often not left with

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sufficient funds to invest in such activities (Ramokgopa, 2015:3). Hence, the
implications are often latent in the fact that economic activities such as agriculture
and tourism are not widely promoted amongst the population. Such poor promotion
affects the extent to which a majority of the people in rural areas is able to engage in
agriculture and tourism related economic activities to boost the economic
performance of the rural municipalities. As such, poor economic performance of rural
municipalities affect generation of additional sources of income; the other major
constraints of developing financially sustainable local government have often been
reflected poor capacity of the municipalities to initiate and implement different socio-
economic income generating projects across different municipalities (Schoeman,
2011:4). Quite often, if such socio-economic income generating projects are to be
initiated, then the roles and functions performed by councillors as community leaders
are of critical significance (Ramokgopa, 2015:3).

However, it has often emerged that it is not only the challenges of lack of skilful
leaders that wards struggle with, but also lack of resources, training and equipment
necessary for the implementation of different community programmes. Limited
financial resources undermine the extent to which councillors and ward committees
are able to effectively accomplish different activities. This is attributable to the fact
that most of the councillors and ward committees operate without the existence of
appropriate infrastructure and housing as offices (Khumalo&Mkhululi, 2016:3). Even
in cases where appropriate offices are put in place, they are usually not well
facilitated and equipped with the relevant furniture and equipment such as phones
and computers as well as administrative support staff.

Nonetheless, councillors of the wards falling within the jurisdictions of the

municipalities that they serve are required to get involved in activities that facilitate
the improvement of the municipality’s social development and economic growth. In
this effort, councillors such assess the extent to which they can initiate programmes
that can be supported by the municipalities and provincial governments to improve
education, health, the management of sanitation services, electricity, water, and
waste management and environmental management. Councillors are also expected
to engage in activities and creation of networks that contribute to the improvement of
business and economic activities within the municipality so as to increase on
employment opportunities in that municipality.

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However, due to the fact that most councillors and ward committees do not have the
mandate to change the conditions in the communities, trends indicate that most
community members are increasingly losing trust and confidence in councillors and
ward committees (Seerane, 2016:7). This is linked to the fact that since most of the
community members are not involved in the strategic planning process, through
liaison with councillors, the latter tend to inflate on what the communities expect
without necessarily ensuring that such needs will be fulfilled. Yet, when the
municipality fails to meet such promises and expectations, the drawbacks are often
latent in frustrations and service delivery protests (Palmer, 2011:5). All these distort
the smooth planning and implementation of different development programmes at
the community levels. In addition to the fact that legislations confine ward
committees to mere advising councillors and providing inputs from communities,
other challenges are linked to the fact that lack of focus mars their functionality as
others are involved in personal businesses that limit the time they spend on ward
committee’s related activities.

It is also apparent from different empirical studies that poor communication and lack
of information flows between wards and municipal councils is the other factor
undermining the effectiveness of councillors and ward committees as agents of
development at community levels. Given the diverse challenges that councillors face,
it is also important that they facilitate the integration and coordination of different
activities by liaising with relevant key stakeholders (Palmer, 2011:5). Such an
approach would not only influence the improvement in prowess of resource
mobilisation, but also the overall optimisation of the limited available resources. In
other words, all these tend to undermine the development of financially sustainable
municipalities.

5.4.3 Deficient Local Government Procurement System

Local government sphere’s procurement process is a critical determinant of cost
savings that subsequently impacts on the financial reserve that a municipality holds.
It influences the successful implementation of different projects as well as the ability
to gain from the competencies and capabilities of different suppliers (The South
African Government General Procurement Guidelines, 2013). It also bolsters the
selection of competent and quality suppliers, and cost minimisation resulting from the
elimination of the risks of the selection of less competent suppliers. All these

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subsequently impact positively on the capabilities of the local municipality to not only
optimise the existing financial resources, but also to generate new sources of
revenues. Unfortunately, the ability to gain from such values has often been affected
by risks arising from frequent flouting of the critical processes for effective local
government procurement. Key processes used in the procurement process by the
local government sphere may entail defining of the procurement objectives,
advertisement of bids for tenders of the potential suppliers, identification of the
potential suppliers, interview and selection of the potential suppliers, training and
building of the competencies of suppliers, managing the procurement process, as
well as monitoring and evaluations to improve the overall effectiveness of the
procurement process. To enhance cost savings and financial sustainability of the
local government sphere, extensive analysis and sensing are often undertaken to
discern the pattern of new and emerging changes and how such trends can affect
the critical development agenda and programmes that the local government sphere
has specified to be achieved.

It is through the analysis of such trends that local government managers are able to
understand new emerging social, economic and political changes that must be
addressed by the development and introduction of new development programmes.
The completion of such analysis is often followed by setting of the objectives and
goals that must be attained as well as new materials, equipment or services that
must be procured to support the implementation of such different social, economic
and political projects (Seerane, 2016:7).

However, as such analysis is being undertaken to define new goals that must be set
and attained as well as the corresponding services that must be procured, relevant
analysis is often not undertaken as a critical preface for understanding the critical
underlying factors prior to the outline of the procurement goals and services that
must be procured. In most cases, challenges arise from the tendencies of some of
the managers to interpret that since the details of the problems are already known,
there is no need to undertake analysis to understand the other factors that may
explain the different dimensions of the problem. This affects the selection of the best
suppliers.

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Similar deficiencies also often affect bid advertisement as it is usually not the case
that all tenders are advertised prior to being offered to the selected suppliers. In
certain cases, suppliers’ good track records tend to influence the executives’
decisions and the decisions of senior managers to consider certain suppliers. This
affects the effectiveness of the procurement processes and initiatives undertaken to
improve the overall effectiveness of the procurement process at the local
government sphere. Although such a practice may affect the effectiveness of the
procurement processes, basing decisions on the good performance records of the
suppliers is however also one of the strategies that some of the managers apply to
minimise wastage of financial resources on the advertisement and processing of
tenders to suppliers with the clearly known requirements. Such initiatives would
influence cost savings to impact positively on the level of financial sustainability of
the local municipality. In other words, there is a divergence between theories and the
actual organisational practice on procurement on the basis that whereas in theory, it
is presented that organisations tend to undergo certain prescribed processes when
undertaking procurement, in practice; however, some of the managers tend to rely
on past good performance of the suppliers to select suppliers instead of spending
funds on new procurement initiatives. That implies, in certain cases, that the
prescribed procurement processes are flouted and breached by managers.

However, besides advertisements that are often avoided perhaps due to costs,
challenges may also tend to arise from the process of the identification of the
potential suppliers. Thorough analysis and identification of potential suppliers is
critical for identification of the most competent and capable suppliers. The
identification and selection of less competent and capable suppliers affect the quality
of projects and the initiatives of ensuring that the implementation of different socio-
economic activities influences the achievement of the desired strategic objectives
and goals. This also affects the extent to which a municipality is able to effectively
invest in income generating socio-economic projects to leverage the overall level of
the financial sustainability of that municipality.

However, despite the fact that stronger initiatives are often undertaken to enhance
the identification of suppliers with potential competencies and capabilities, risks often
still arise from the fact that such processes are often ingrained with errors or
mistakes that in some of the cases cause the selection of the suppliers that are not

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that competent and capable. Even though in a bid to ensure that competent and
suitable suppliers are selected, interviews are required to be undertaken by the
managers in the procurement department to ensure that only competent and capable
suppliers are selected, there are still often risks arising from the tendencies of some
of the managers to flout the procurement regulations by not following the required
steps or just using previous information and records of the suppliers to select
suppliers for different procurement activities (Buttimer, 2011; Charette, 2009:28;
Faure & De Villiers, 2014:61).

Capabilities and competencies of the organisations and suppliers tend to change

either positively or negatively as time evolves. This affects the selection of the
competent and suitable suppliers because the supplier could have experienced
certain incidents that may limit their effective accomplishment of the present tasks as
compared to the previous tasks. In effect, evaluation of each supplier during each of
the required procurement of services, therefore, enables the evaluation of the
present competencies and capabilities of the suppliers. It eliminates risks of selecting
suppliers that although had been competent in the past, their competencies and
capabilities could have declined with time. This implies that training and developing
the selected suppliers is critical for leveraging their capabilities.

Besides such challenges, the process for appointment of the procurement board
members are also in certain cases determined by political affiliations, other than the
competency of a particular individual. These are often exacerbated by poor
management of the programme after the award of the procurement contracts to the
suppliers, corruption, lack of political cooperation that limits the effective
implementation of certain procurement activities, and lack of adequate financial and
non-financial resources. Corruption affects the effectiveness of local government
procurement. Such a view is attributable to the fact that corrupt activities such as
bribery and favouritism affect the effectiveness of the decisions undertaken to ensure
that the appropriate company is selected. Most of these incidents of corruption
comprise of straight forward bribery to the collusion with the procurement staff and
the governance related issues in which some of the procurement contracts are
offered to the suppliers in which some of the procurement staffs are major
shareholders (Ambe&Badenhorst, 2012:242).

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Besides corruption, lack of political cooperation also limits the effective
implementation of certain procurement activities. This is attributable to the fact that
poor cooperation and liaison between different political tend to cause circumstances
where certain projects cannot be implemented due to lack of political cooperation to
mobilise relevant resources. Such lack of political cooperation also tends to affect
the mobilisation of the critical financial and non-financial resources
(Ambe&Badenhorst, 2011:110). In other words, all these tend to limit the extent to
which procurement processes are able to enhance the optimisation of the existing
financial resources whilst also facilitating the development of socio-economic
projects that create new sources of revenues.

5.4.4 Poor Leadership and Governance

Poor leadership and governance is one of the factors affecting the development of
financially sustainable municipalities (Acevedo, Rivera, Lima & Hwang, 2010). This is
accentuated in the fact that poor leadership and governance causing corruption
affect the effective utilisation of the municipal financial resources to influence the
achievement of all the desired socio-economic outcomes. This increasing spate of
poor leadership and governance is caused by the increasing emergence of poor
ethical culture (Public Sector Audit Committee, 2013; Public Sector Audit Committee,
2014). As most senior leaders are accused of involvement in corruption, this tends to
affect the development of the organisational moral fabric that leverages the overall
leadership effectiveness. Quite often, these decaying morals are further exacerbated
by lack of ethical guidelines and poor enforceability of ethical breaches that are all in
turn causing loss of billions. This is accentuated in the Corruption Watch Report
(2015) that indicates that since municipal executive top management officials are
granted the mandate to determine their salaries, most of them have been engaged in
the unscrupulous acts of increasing their salaries up to about 50%.

Even in the midst of the Auditor-General’s Reports (2016) that about 14

municipalities have received unqualified reports, the municipal managers receive
about ZAR950 000 and the Chief Financial Officer gets about ZAR900 000 excluding
benefits that make it total about ZAR 1.2million. Besides bribery, extortion,
embezzlement and graft, the other forms of corruption have been latent in nepotism
and patronage systems (Mcgee&Gaventa, 2014; Miso, 2011; Monahan, 2012:56).
Even though efforts are being undertaken to overcome these corruption related

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challenges, the major stumbling blocks are often linked to corruption, financial
mismanagement and the appointment of senior officials solely on the basis of
political connectivity or employment equity considerations. Besides the fact that
municipal managers tend to be under-qualified, but overpaid, the Democratic
Alliance’s (2010) report on corruption in South African municipalities indicates that
most corrupt transactions at the municipalities are characterised by illegal tendering
practices, unauthorised loans to councillors and in certain cases, activities that
equate outright looting (The Public Service Commission-PSC, 2011:10). Even
though due to these corrupt practices, most irregular expenditures are often
identified by the Auditor-General, most of the Auditor-General’s recommendations
are often not implemented. The escalating rate of these corrupt practices is also
affecting the collection of sufficient revenues to meet service delivery expenditures.
Then again, one of the Auditor-General’s recommendations is that municipalities
should not spend about 30% of their budgets on salaries. In this process, the report
also requires 70% of the municipal budgets to be dedicated towards infrastructure
development. However, that has often not been the case, as most of the
municipalities are spending beyond the restricted expenditures.

Due to increasing cases of unethical and corrupt practices, the government is

increasingly seeking to improve the implementation and enforceability of the
provisions of the 1996 Constitution on corrupt and unethical practices as well as the
provisions of legislations such as Local Government Municipal Structures Act No.
117 of 1998 and the Municipal Systems Act No. 32 of 2000 (Mcgee&Gaventa, 2014;
Miso, 2011; Monahan, 2012:56). Whereas Local Government Municipal Structures
Act No. 117 of 1998 requires councillors to comply with the established code of
conducts, the Municipal Systems Act No. 32 of 2000 introduces code of ethics for all
municipal officials. In case of breach of these code of conduct and code of ethics,
some of the deterring actions may encompass disciplinary actions, recovery of
losses, prosecutions and sanctions.

Nevertheless, poor enforceability of these codes is affecting the overall commitment

of the government to reduce the scale of the increasing spate of corrupt and
unethical practices across different municipalities (Mcgee&Gaventa, 2014; Miso,
2011; Monahan, 2012:56). As these limit the initiatives for developing financially
sustainable municipalities, the other sources of wastes are arising from under-

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utilisation of the allocated funds. Besides graft and corruption, the issue of poor
management often arises from the contractual human resource policies used at the
municipal levels. In all the municipalities, all the municipal managers are employed
according to contracts of five years.

Although renewable, these contracts often do not exceed two renewal terms, thereby
undermining the extent to which the municipalities are able to develop and retain
some of the talented managers (Moreno, 2010: 97; Mulgan, 2003; National Treasury,
2003). These restrictions in these contractual obligations affect the effective
performance of the municipalities on the basis that since municipal managers are
only employed for a certain period of time, it often affects their commitments and the
efforts that they are able to put to ensure that the desired outcomes are achieved. In
other words, the fact that managers are aware that they not employed permanently
affects their commitment. In most cases, more talented mangers tend to initiate new
projects that would turnaround the performance of the municipalities. However, when
their contracts expire and they leave, the performance of the good projects that they
started tends to decline due to the fact that since such unique projects will have been
started as a result of their unique understanding of why such a project is important, it
often turns difficult for new incoming managers to take forward such projects
(Moreno, 2010: 97; Mulgan, 2003; National Treasury, 2003).

In other words, contractual employment of managers often affects most of the

municipal managers’ ownership and commitment towards the initiated projects.
Besides deficiency arising from the contractual employment of managers, other
challenges also often arise from the difficulties of having to balance politics with
administration. In most of the cases, decisions on the projects to implement or not to
implement are often driven by politics. This affects thorough analysis and selection of
the most suitable projects that would catalyse revenue generation to spur the overall
improvement of the financial sustainability of the municipality. If the challenges are
not arising from the contractual employment of municipal managers or the difficulty
to balance politics with municipal administration, challenges that can affect the
financial sustainability of the municipality may arise from poor governance.

Poor governance causing corruption and wastes of public resources often affect cost
savings and the preservation of financial reserves that would leverage the overall

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improvement of the financial sustainability of the municipalities. Although relevant
legislation and policies are put in place, some incidents of corruption and graft have
often still been common to undermine the overall financial sustainability of most
municipalities (Moreno, 2010: 97; Mulgan, 2003; National Treasury, 2003).

Despite such challenges, the analysis of the case study implies that there are some
municipalities that have been successful in the implementation of measures that
influence improved revenue collection and financially sustainability.

5.5 MUNICIPALITIES WHICH ARE SUCCESSFUL IN LEVERAGING

REVENUE COLLECTION AND FINANCIAL SUSTAINABILITY
As a result of the implementation of the appropriate financial sustainability model, the
Auditor General’s Report (2017) indicates that some of the municipalities in Gauteng
received clean audit reports. It also indicated that as about 80% in the Western Cape
received clean audit reports, 18% were the municipalities in Kwa-Zulu Natal and
16% were the municipalities in the Eastern Cape Province (Kimi, 2017). However, to
demonstrate how the implementation of financial sustainability measures bolsters
revenue collection, the analysis in this section only focuses on metropolitan
municipalities.

5.5.1 City of Johannesburg

The City of Johannesburg is one of the metropolitan municipalities that have

experienced significant increase in revenue collection as a result of the
implementation of the appropriate financial planning and governance framework
(Dlamini, 2018).Sound financial planning and governance are some of the pillars for
leveraging effective financial management that in turn bolsters financial
sustainability. To improve the approach to financial management and bolster the
city’s financial sustainability, the City of Johannesburg embarked on the
development and implementation of measures that improve financial governance
and utilisation of the available funds in the ways that minimise financial wastes. This
is mainly attributable to the fact that following the take-over of the City of
Johannesburg by the Democratic Alliance, significant efforts has been undertaken to
turnaround the performance of the City of Johannesburg from decline (Dagada,
2017). During the reign of the African National Congress led administration, poor
governance, ethical practice and corruption that characterised the system of

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governance affected the effective conceptualisation and implementation of sound
financial management systems. This caused significant declines in revenue
collection. This view is accentuated in the opinions of Rabelani Dagada, Mayoral
Committee for Finance (African News Agency, 2017. Johannesburg Finances in a
Healthy State) who state that:

“The truth of the matter is that under the ANC administration, the city
and its finances were run in an environment of chaos and disorder,
all of which allowed a culture of corruption to fester and flourish.
Since coming into office, we have learnt that almost 19% of the city’s
R55 billion budgets have over the years been lost to corruption.”
Certainly, this demonstrates how poor ethical leadership and governance can affect
financial sustainability of the municipality. In effect, as the City of Johannesburg
adopted sound financial management and governance system, the positive results
soon emerged in the improvement of revenue collection. This is attributable to the
fact that as compared to the revenue collection of R34.9 billion in 2015/16, in
2016/17, the revenue collection increased to 35.2 billion (Dagada, 2017). The
implementation of the appropriate financial management and governance system not
only influenced the improvement of revenue collection, but also the significant
reduction of the variance between the budgeted and actual revenue collection. This
is explained by the fact that the budget variance reduced from 3.4 billion in 2015/16
to 2.7 billion in 2016/17. This demonstrates the extent to which sound financial
management and governance can leverage revenue savings to impact positively on
the overall financial sustainability of the municipality.

Part of the initiatives of sound financial management and governance that influenced
the improvement of revenue collection is attributable to consultation and involvement
of stakeholders such as the Auditor General of South Africa, National Treasury and
Investors’ City in the planning and governance of the finances of the City of
Johannesburg (Omarjee, 2017). The other reasons are associated with the
improvement of the billing system. This is attributable to the fact that as a result of
the defective billing system, there were so many customers that were not being billed
for electricity, water and sewerage services.

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However, this was reviewed and corrected to ensure that all the customers are
billed. This impacted not only the increment of revenue collection, but also significant
reductions of the costs of credit management and handling customer complaints. All
these significant cost reductions contributed enormously towards improving the city’s
financial liquidity from R3 billion to R4 billion. The implementation of relevant
financial management and governance framework also minimised wasteful
expenditures to leverage the accumulation of excess financial reserves of which
some has been invested in the improvement of service delivery such as the micro-
grid extension to the informal settlements as well as investment in roads and traffic
lights that in turn improve the overall investment conditions of the City of
Johannesburg. Some of the measures that were undertaken to reduce wasteful
expenditure encompassed reduction of the financial expenditures on luxuries such
as self-promoting advertisements, marketing, unnecessary domestic and
international travels, conferences and seminars and unnecessary consultancy and
professional fees (Dlamini, 2018). The implications are latent in the fact that the City
of Johannesburg was able to save about R500 million.
However, as much as the leverage of financial sustainability of the municipality is an
initiative that the municipality can initiate and influence; trends from the City of
Johannesburg indicates that there are also instances where certain issues that may
affect the financial sustainability of the municipality may fall outside the control of the
municipalities (Tau, 2015). In the City of Johannesburg, such issues have been
reflected in the fact that City Power, an energy arm of the City of Johannesburg
experienced cash flow problems as a result of the seizure of VAT funds to the value
of R314.5million by the South African Revenue Service. This was attributable to the
income tax issue that had not been resolved. These challenges were compounded
by Eskom’s termination of the subsidy to City Power for the purchase of power from
Kelvin Power Station. This caused a loss of R268 million to the City of
Johannesburg.

The other issue that undermined the initiatives for leveraging the financial
sustainability of the City of Johannesburg arose from the failure of the Department of
Energy to honour grant allocation of R2.4 billion to City Power for electrification of
housing developments in the city. This caused the loss of R288 million to the City of
Johannesburg. Despite such challenges, the City of Johannesburg has also been

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adopting the appropriate liquidity management approach to leverage its overall level
of financial sustainability. These initiatives are being undertaken by meeting all short
term obligations as they fall due. In effect, all contractors, creditors and salaries are
paid on time in compliance with the National Treasury requirements that all suppliers
must be paid within 30 days of receiving tax invoice. This contributes enormously
towards reducing costs arising from the interests that must be incurred if payments
are not made in time. The other initiative for bolstering the effectiveness of liquidity
management has been reflected in the efforts to use short term borrowings to deal
with cash flow challenges. This is reflected in about 3 billion that the City of
Johannesburg borrowed from the Development Bank of Southern Africa to meet its
cash flow problems.

Although borrowing is associated with costs, it still aids to keep the city afloat in
situations of financial difficulties. All these initiatives are being accompanied by
constant investments in the improvement of the investment conditions in the city by
tackling crime, abandoned buildings and improvement of the conditions of roads.
Other initiatives have entailed the development of departments that market the City
of Johannesburg as one of the attractive investment destinations in the Africa
continent. Improved investment conditions influences the attraction of different
businesses that in turn bolsters the increment in revenue collection. However, it is
not only the City of Johannesburg which has been experiencing positive results from
the conceptualisation and application of the appropriate financial management and
governance system (Tau, 2015). City of Tshwane is the other metropolitan
municipality has gained enormously from the implementation of the measures to
leverage its financial sustainability.

5.5.2 City of Tshwane

In a bid to leverage its financial sustainability, the analysis of different documents

also implies that the management of the City of Tshwane is undertaking a
combination of measures to bolster its financial performance. Some of these
initiatives are reflected in the adoption of the appropriate budgets and service
delivery budget implementation plans to ensure that all financial resources are
utilised in accordance with the stipulations in the budget plans. This contributes to
the minimisation of wasteful expenditure and the optimisation of the limited financial

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resources to meet as an array of different needs as possible (Msimanga&Fourie,
2017). As a result of the significant reductions of wasteful expenditures, the City of
Tshwane has been able to obtain unqualified audit report from the Auditor General of
South Africa for the year 2016/17. The adoption of the appropriate budget plans is
also being accompanied by the review of the spending levels to bring it within the
prudent financial limits as well as the adoption of good governance approach to
reduce wasteful expenditures. Other initiatives for minimising financial wastes have
been reflected in the development of the mechanisms for controlling supply chain
processes. This would aid ensuring that all forms of corruptions and wastes that
often arise from the cancellation of supply contracts in case of breach of supply
chain regulations are minimised.

To accomplish this, the City of Tshwane has been extricating itself from unlawful and
expensive contracts such as the PEU contract which the Auditor General flagged as
one of the biggest incident of irregular supply chain expenditure that must be
addressed. At the same time, the City of Tshwane is also among others
disentangling it from unaffordable broadband and fleet management contracts.
These initiatives will certainly minimise wasteful expenditures to unlock enormous
financial reserves that can be used for financing other service delivery programmes
of the municipality. The implications of all these are latent in the fact that
unauthorised expenditure significantly reduced from R1.658 billion in 2015/16 to
R620 million in 2016/17.

Unauthorised expenditure refers to the financial expenses that are not approved in
the budget. Unauthorised expenditures are usually caused by employee-related
costs, bulk purchases, depreciation, finance charges and contract services. The
decline of unauthorised expenditures has also been followed by the decline of
irregular expenditure that reduced from R950 million in 2015/16 to R838 million in
2016/17. This contributed to leveraging the financial liquidity of the City of Tshwane
from R1.2 billion in 2016 to R2.1 billion in 2017. In effect, the City of Tshwane closed
with an operating surplus of R704 million (Msimanga&Fourie, 2017).

To further bolster the financial sustainability of the City of Tshwane, the management
has adopted the principle of financial sustainability by undertaking long-term
planning to leverage the resilience and sustainability of the municipality. It has also

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adopted the principles of stabilisation and revitalisation by adopting measures that
turnaround its performance. The City of Tshwane is also adopting more effective
performance monitoring and evaluation mechanisms to identify and correct
expenditures that are deviating from the prescribed budgets. These initiatives are
being accompanied by the development and use of e-procurement systems to
minimise the occurrence of unjustified supply chain processes, corruption and mal-
administration that previously characterised most of the supply chain processes
(Msimanga, 2017). To boost the economic activities and develop additional new
sources of revenues, the City of Tshwane has also been initiating and developing
partnerships with the private sector as well as social partners and the communities.

In addition to these, the City of Tshwane is also investing in the initiatives that bolster
the attractiveness of the investment conditions within Tshwane so as to attract new
businesses and generate new sources of revenues. However, as the City of
Tshwane engages in the conceptualisation and application of such initiatives, there
are also new challenges that have been emerging. Some of these challenges are
reflected in the increment of consumer debt which has increased from 1.6 billion to
10.2 billion in 2017. Difficult economic conditions and the rising unemployment is
also affecting payment levels. This is attributable to the fact that the economies of
most of the major metropolitan municipalities such as the City of Tshwane are
strongly integrated with the economy of the country (Msimanga, 2017). Hence, major
changes in macro-economic policies often directly affect the economies of the
metropolitan municipalities.

Besides the failure of the credit control policy to bolster revenue collection, the other
challenges have been emanating from the material losses of R1.6 billion that arose
from the electricity purchased. The other challenges that are affecting the initiatives
to bolster the financial sustainability of the City of Tshwane are arising from
administrative and technical errors, faulty meters, negligence, and theft of electricity,
meter tampering and unmetered electricity and water consumption that totalled R1
billion in 2016.

To deal with these challenges and leverage the financial sustainability of the City of
Tshwane, the management is developing a mechanism for curbing illegal electricity
connections, auditing metering installations, normalisation of pre-paid meters and

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rollout of smart meters (Msimanga, 2017). These initiatives are being accompanied
by the efforts that ensure that prepaid meters are installed before energisation of
electrical infrastructure. The other measures have entailed the redesign of electrical
network installations, substation zone monitoring, electrification of informal
settlements, and refurbishment of electricity infrastructure and boosting capacity of
law enforcement. To improve its revenue collection, the City of Tshwane is also
undertaking the initiatives to collect R582 million from government departments,
R1.6 billion from businesses and R4.1 billion from households. It is also aiming to
increase revenues from the rented municipal properties by clamping down on illegal
occupation of city properties (Msimanga, 2017). Despite challenges, all these
initiatives will certainly leverage the financial sustainability of the City of Tshwane in
the long run. It is not only the City of Tshwane that has been striving to leverage their
financial sustainability, but also the City of Cape Town.

5.5.3 City of Cape Town

At the core of the initiatives for bolstering the financial sustainability of the City of
Cape Town has been the adoption of the policy of good governance and
management. The City of Cape Town has prioritised good governance by ensuring
that municipal authorities and leaders lead by example. These initiatives have been
accompanied by the development of the internal policies that govern and control
good governance and unethical conducts (Nicholson, 2016). To accomplish this, the
City of Cape Town has developed the internal codes of conduct that govern good
governance and ethical practice. Through the development and implementation of
these good governance initiatives, the City of Cape Town has been able to hold
every person accountable for how public resources and finances are utilised in the
implementation of different programmes. This has minimised resource wastage and
the loss of the critical financial resources to corruption and other forms of wasteful
financial expenditures. To further minimise wasteful expenditures, the management
of the City of Cape Town has also adopted the appropriate supply chain policies.
Through such supply chain policies, the City of Cape Town is able to ensure
transparency and accountability in the way the procurement activities are
accomplished. This has enabled the City of Cape Town to reduce the risks of
contract cancellations and the costs that often arise when claimants have to be

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compensated for breach of contract. It also reduces the costs of litigations that often
arise from the supply chain and procurement related disputes (Nicholson, 2016).

Yet, as the City of Cape Town uses such initiatives to control the procurement
activities as well as their associated costs, the other initiatives which reduce wasteful
expenditures to bolster financial sustainability has been latent in the
conceptualisation and implementation of the appropriate strategic plans. When
accompanied by the use of the appropriate service delivery budgets, this influences
the extent to which the City of Cape Town is able to ensure that all financial
expenditures are undertaken as plan (Kimi, 2017). This minimises incidents of
unauthorised expenditures that cause a lot of financial wastes in most of the
municipalities. In line with the provisions of the Municipal Finance Management Act,
the existence of such a strategic plan also enhances the holding of all office-holders
accountable and responsible for their actions.

In other words, the existence of the appropriate strategic plan acts as the guiding
rode that can be used for monitoring and evaluation of the processes of the activities’
accomplishment as well as budget expenditures (De Lille, 2018). All these initiatives
are accompanied by the development and application of the mechanisms that bolster
tender demand and supply chain management, faster turnaround times for tender
appeals, extensive monthly reporting systems, project management training and due
diligence requirements for all the office-holders. The implications of all these are
latent in the fact that City of Cape Town has been able to accumulate the necessary
financial resources that can be used for financing the implementation of different
socio-economic programmes and projects. This has not only contributed to the
creation of enormous employment opportunities, but also the overall attractiveness
of the investment conditions in the City of Cape Town (De Lille, 2018).

The overall attractiveness of the investment conditions in the City of Cape Town
influences the attraction of more businesses. More businesses expose the City of
Cape Town to an array of different sources of financial revenues. It is through such
initiatives that the City of Cape Town has been able to leverage its overall level of
financial sustainability. The accumulated funds have rendered it possible for the City
of Cape Town to invest in the initiatives that leverage its economic growth and
development. This is accentuated in the fact that in 2017, the City of Cape Town

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advanced about R1.3 billion to Wesgro, Business Process Enabling South Africa
(BPeSA) and Greencape (De Lille, 2018). These initiatives created about 1370 jobs
in the business process outsourcing, ICT, manufacturing and renewable energy
sectors. Besides the City of Cape Town, such quests are also evident in the
initiatives being undertaken by eThekwini Municipality to leverage its financial
sustainability.

5.5.4 eThekwini Municipality

The financial sustainability measures being implemented by eThekwini municipality

is also inducing positive results that influence its revenue collection. Some of these
financial sustainability measures encompass rates policy, debt collection, credit
control policy, the adoption of the appropriate capital funding model and supply chain
management model (Sithole, 2016). In terms of the policy on rates, eThekwini has
adopted the rates increment policy that enhances the tracking of rates payment by
residents. These monitoring mechanisms enabled eThekwini municipality to ensure
that all its rates are paid by residents on time. Such initiatives have been
accompanied by the adoption of the policy that enhanced the refurbishment of all its
city properties to leverage increment of payments of rentals.

As on the other hand, eThekwini municipality is also adopting the measures for the
collection of all its debts. This is being undertaken by encouraging early payments
and interventions in case of defaults to ensure that the payments are not delayed
until it is too late. The implications of all these are latent in the fact that eThekwini
emerged as one of the metropolitan municipalities with the best revenue collection
rates. This is attributable to the fact that as a result of the implementation of such
policies, eThekwini achieved 105% of revenue collection (Sithole, 2016).

Even though this bolstered the increment in the rate of the collected revenues and
the financial reserves of the municipality, eThekwini still adopted the appropriate
capital funding model to enlarge its sources of revenues. This capital funding model
has rendered it possible for eThekwini to access funds from government grants,
public contributions and donations, borrowings and internally generated revenues.
These sources of revenue leverage the financial sustainability of eThekwini
municipality on the basis that they avail the necessary funds for financing the
implementation of its present and future service delivery improvement programmes.

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Yet, as eThekwini adopts more aggressive measures to minimise unauthorised and
wasteful expenditures, the other initiatives for reducing financial wastes has been
reflected in the introduction of more appropriate supply chain management systems
(Mbatha&Nkabane, 2016). This has been undertaken by introducing procurement
scheduling to ensure that all supply chain activities are accomplished in accordance
with the procurement regulations. Other initiatives have entailed the introduction of
procurement scheduling to avoid delays, electronic contract request tracking system,
centralized contracts register and improvement of turnaround times with regard to
the supply chain management processes.

As eThekwini municipality adopts these supply chain improvement mechanisms, the

other strategy for improving financial sustainability has entailed the introduction of
more effective oversight and accountability roles by upholding the accountability
requirements in the Public Finance Management Act and in the Municipal Finance
Management Act (Mngadi, 2017). These initiatives have been accompanied by the
improvement of the roles and functions performed by the municipal oversight bodies
such as the Mayoral Committee. Certainly, these measures influenced the reduction
of the level of unauthorised expenditures as well as financial wastes to leverage the
overall financial reserves that the municipality has at its disposal.

Significant reductions of financial wastes influenced the improvement of the overall

financial health of the municipality. This view is accentuated in the Auditor General’s
Reports that indicate the finances of eThekwini to be in good state. Even if
eThekwini is in good financial health, it has still been investing in the initiatives such
as the improvement of road conditions, amenities and other socio-economic
infrastructures to render it a more attractive tourism destination (Mngadi, 2017). The
implications are latent in the fact that eThekwini has been attracting businesses such
as Samsung, Toyota and Unilever to leverage the increment and expansion of its
sources of revenues. These initiatives are being accompanied by investments in
productive projects such as the development of its beaches and tourism potential.
This bolsters revenue collection.

In terms of tourism, Durban Tourism and Durban Investment Promotion have

embarked on the campaigns to promote eThekwini as the appropriate investment
destinations. This initiative is being accomplished using Durban Visitor Strategy that

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aims to attract five million visitors to inject about R10 billion in terms of the collected
revenues and about 74000 support jobs (Sithole, 2016). To further influence the
development of commerce and tourism between Kwa-Zulu Natal and the rest of
Africa, eThekwini is also capitalising on using SA Express’ direct flights into other
cities in the SADC region. In other words, all these demonstrate how to achieve
financial sustainability; the sources of revenue must be expanded to offer an array of
different sources of funds. It is such sources of funds that bolster the financial
sustainability of the municipality.

5.6 CONCLUSION
Trends influencing the evolution of the concept of financial sustainability in the South
African local government since the dawn of Post-1994 democratic dispensation have
arisen from the emergence of the concept of a developmental state, changes in
demographical trends, financial optimisation regulations, and stronger financial
controls and oversights exercised by regulatory institutions and decentralisation. To
influence the improvement of municipal financial sustainability, most municipalities
tend to use financial sustainability models and methods that include Central
Financial Grant System, SALGA’s Model for Financial Sustainability, Investment in
Revenue-generating Activities and Managing Municipal Operational Efficiency as a
Driver of Cost Minimisation.

However, despite significant strides, initiatives for leveraging financial sustainability

of most municipalities are still constrained by inhibitors such as inadequate municipal
capacity, limited income generating activities, deficient local government
procurement system and poor leadership and governance. Against this backdrop,
the discussions of the findings are undertaken in the next chapter to identify a new
model on financial sustainability which can be extracted and proposed for improving
the financial sustainability of the South African local government.

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Chapter 6

DISCUSSIONS AND LINKING TO LITERATURE REVIEW

6.1 INTRODUCTION
Discussions of the findings are guided by the key discourses in the conceptual model
on local government financial sustainability in Figure 1. In the context of the
illustration in Figure 1, it is argued in the conceptual model in Figure 1 that the
integrated approach for improving financial sustainability in the South African local
municipality is often predicted by four main constructs. The first construct would
require the development and application of four main pillars of financial sustainability
encompassing strategic financial planning, income diversification, sound financial
administration and management, and own income generation. The edifying effects of
these four pillars are further catalysed by a continuum of financial and on-financial
sustainability constructs.

It is at this point that this research fills one of the gaps arising from the fact that
although financial sustainability exceeds the notion of financial sustainability to
emphasise the initiatives for improving sustainability, most authors emphasise only
financial factors are pre-requisites for achieving sustainability. In this endeavour, the
three foundational constructs that would influence financial sustainability are
reiterated in Figure 1 to encompass financial risk management, financial governance
and financial ethical leadership. The effectiveness of these constructs is catalysed by
a continuum linking the three constructs to the mainly three foundational non-
financial constructs encompassing political stability, fiscal and economic stability,
forecasting and sensing to mitigate the devastating negative effects of natural
calamities and disaster. As the application of such integrated constructs influence
improvement of financial sustainability, it is still often critical that an appropriate
framework is developed to evaluate the overall maturity of the financial sustainability
of the local municipality according to four perspectives which include: liquidity,
resilience, service and fiscal responsibility and public confidence.

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Figure 3.1: A Conceptual Model on Financial Sustainability of the South African
Local Government

Source: Authors’ Interpretation and Conceptualisation of theories on Financial

Sustainability in the South African Local Government

This must also be accompanied by the application of five spectrums aligned to

Birney et al.’s (2010:7) five spectrums of a government’s financial sustainability that

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include: at risk, compliance-based, incremental, strategic, and systematic. The
details of the discussions appear below.

6.2 FOUR PILLARS OF FINANCIAL SUSTAINABILITY

The first construct would require the development and application of four main pillars
of financial sustainability encompassing strategic financial planning, income
diversification, sound financial administration and management, and own income
generation.

6.2.1 Strategic Financial Planning

Strategic financial planning edifies the prioritisation of the activities critical for
improving the sustainability of a public sector organisation. It outlines the critical
investment programmes and projects that must be undertaken to generate funds and
improve the overall financial sustainability of the government department. It provides
guidelines and directions on the initiatives that must be undertaken to achieve the
financial sustainability objectives. The analysis of the flexibility of the adopted
strategic financial plan must also be accompanied by the analysis of the extent to
which such strategic financial plans are linked to the other government policies and
integrated development plans emphasising the need to improve the sustainability of
a government department.

On the other hand, the indicators of income-generating activities would explore the
extent to which a government department has invested in an array of revenue
generating activities. It examines the extent to which not only investments are
undertaken on critical specific revenue generating projects, but also how the
executives in the government department has been able to network and develop a
network of critical donors that are prepared to support an array of different revenue
generating projects. Such analysis often entails the evaluation of the extent to which
the sources of government revenues are diversified so that in case, there is a
shortage of revenue generation from one source, the revenues from the other
sources can be engaged. That is what financial sustainability refers to. Such a view
seems in tandem with facts emerging from the analysis of the findings in which it is
noted that it is strongly emphasized in the MFMA that the improvement of the
financial sustainability of the municipalities would require strengthening the municipal
planning and budgeting process. This is attributable to the fact that it is through

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planning that the municipal authorities are able to discern how the existing resources
can be optimised to achieve the outlined key priorities. Municipal planning and
budgeting may not only require determining how to utilize thee available revenues,
but also how to generate new sources of revenues to influence the extent to which
the municipality is able to its present as well as future needs and demands.

According to the MFMA Circular, the effectiveness of the municipal planning and
budgeting depends on the extent to which it is accomplished according to the cycle
processes encompassing a planning phase, preparation phase, tabling and public
consultation phase, revision and debate phase and implementation phase. As on the
other hand, the national development plan offers critical strategies for the
development of a sustainable South African government. It outlines critical priorities
and directions that would influence the guide the local municipalities and
municipalities on the directions and critical activities that they must be accomplish to
become wholly sustainable.

The above-mentioned critical priorities and directions are reflected in the national
development plan’s strategic plan that serves to achieve four broad objectives
encompassing the provision of the main goals that the South African government
aims to achieve by 2030, building key obstacles to the effectiveness of the process
for the implementation of the national development as well as the other critical
strategies that can be used to overcome such obstacles. The other fundamental
objectives of the national development plan entail the creation of a framework and
the basis of thinking that can enable the effective utilisation and optimisation of the
existing limited public financial resources. It is on that basis that the implementation
of the national development plan would aid improvement of the financial
sustainability of the local municipality. This is attributable to the fact that as the local
municipality strives to achieve some of the critical objectives and goals of the
national development plan, then such quests often create the impetus for local
municipality to invest in areas of priorities that would not only minimise cost savings,
but also the generation of the additional new sources of revenues.

Cost savings arising from the implementation of the national development is

accentuated in the fact that the national development agitates for investment in the
socio-economic projects such as better health care facilities, better education

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facilities, and housing and the living conditions and standards of living as edified by
the constant provision of electricity and water.

6.2.2 Income Diversification

Financial sustainability of a government department depends on the availability of
different sources of funds. That implies reliance on only a few sources of income for
the government department can undermine the extent to which it can be sustainable
in the future. It is, therefore, critical for government departments to become more
creative and innovative in the development and implementation of a combination of
different innovative programmes that generate incomes. To pull resources that would
be used in the financing of different developmental activities, SALGA uses a funding
model that requires each local municipality to contribute 0.5% of the total salary and
allowances budget, as district municipalities are expected to contribute 0.6% of the
total salary and allowances budget. This contrasts with the approach used for the
metropolitan municipalities in which each metropolitan municipality is expected to
contribute a flat rate fee of 9.1 million per annum.

In addition to the contributions from the municipalities, SALGA also raises funds
through grants from the central government, donations and sponsorships from
different public entities and non-governmental organisations. However, the challenge
with this funding model is that it is not sustainable. This is further exacerbated by the
fact that the contributions from the municipalities tend to be quite limited for SALGA
to effectively meet its developmental obligations. The implications are often reflected
in the fact that most of the collected funds are often only used for administrative
purposes and not in the developmental activities that would generate further sources
of revenues for SALGA.

At the same time, the South African local government has also been significantly
encouraging the local municipalities and municipalities to invest in the income
generating activities and projects. This is attributable to the fact that the increasing
dependence of the local municipalities and the municipalities on the donations and
grants from the central government is increasingly turning to be unreliable and
sustainable. The implications are latent in the fact that instead, central government is
encouraging municipalities to invest in new sources of revenues. Of recent, local
government has been investing in the development of more effective local economic

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development departments in every municipality. The roles of these local economic
development departments are to conceptualise and develop new revenue generating
projects on which significant investments can be committed to spur and stimulate the
development of the sources of revenues through taxes. This is accentuated in the
fact that increasingly, municipalities are being required to be innovative and
developmental to initiate and develop new revenue generating projects. This is
because the expenditures of the central government department are too large to the
extent that even if grants are made available to the municipalities, quite often, such
funds have not been adequate.

At the same time, the government is over-indebted with the effect that by the year of
2016/2017, the estimated deficit is 170.5 Billion. With this high level of indebtedness,
the government is reducing its borrowing rate to imply that the municipalities must
look internally for sources of revenue. To accomplish this, some of the municipalities
have been developing policies and strategies that isolate programmes and projects
in the key command sectors of the municipal economies such as manufacturing,
agriculture and tourism. As much as most of government policies and legislations
emphasize the importance for effective financial management in the local
government sphere, only limited emphasis seems to have been placed on the
generation of additional sources of revenues. This limits the generation of additional
revenue that can be used to finance different government socio-economic projects.

Nonetheless, it is the fundamental argument in the financial sustainability literature

that financial sustainability of a government department depends on the availability
of different sources of funds. That implies reliance on only a few sources of income
for the government department can undermine the extent to which it can be
sustainable in the future. It is, therefore, critical for government departments to
become more creative and innovative in the development and implementation of a
combination of different innovative programmes that generate incomes. Some of the
major sources of government income are often linked to revenues collected as taxes.
In other words, taxes are common sources of government revenue. However,
considering the increase in the service provision initiatives and government
programmes that must be financed, sole reliance on taxes as the major source of
incomes is often the major causes of why most of the government departments are
not financially sustainable. For government departments to be sustainable, sources

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of income must span across taxes to encompass development of services and
products that can be sold to the communities.

6.2.3 Sound Financial Administration and Management

Financial management facilitates effective and efficient development of different
programmes to generate the required funds. It edifies the implementation of the
strategic financial plan that which is a framework outlining critical activities for the
generation and utilisation of the relevant public resources. When used in conjunction
with the establishment of an effective public financial administrative system, it can
edify the efficiency of the process for the utilisation of public resources. Financial
administration, on the other hand, is a process of controlling and putting in place the
necessary mechanisms to effective generation and utilisation of the available public
finances.

It is through sound financial management and administration that government

departments are able to translate the process for the implementation of the strategic
financial plan into practical and tangible realities that influence the change and
transformation of the socio-economic living conditions and standards of the
population. To enhance the achievement of the desired public values, public financial
management and administration is often integrated with the necessary control and
accounting improvement measures.

To leverage cost-savings and create extra financial resources, most of the

municipalities have been engaging in efficiency improvement as strategies for cost
minimisation to unlock enormous cost savings. Through these cost savings,
municipalities would be able to eliminate wastes and leverage their overall financial
bottom-lines to tackle other challenges. In this process, the starting points for most of
the municipalities have often entailed the development of an appropriate municipal
integrated development plan. This is attributable to the fact that the use of the
appropriate integrated municipal development plan enables municipalities conduct
relevant analysis so as to identify critical areas of priorities that the attention must be
directed. As areas of priorities are identified, it becomes easier for the municipalities
to direct most resources to the areas that the customers value most. This enhances
waste minimisation on the basis that resources are not wasted on the areas that the
populations do not attach much significance. In the process of accomplishing this, it

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is not only the municipal integrated development plan which is the major determinant
and guide of the process of resource allocation. Instead, some of the municipalities
often emphasis that basing on the key areas highlighted in the integrated
development plan that an appropriate budgeting process is undertaken. The use of
an appropriate budgeting process improves the process of resource allocation to
minimise the overall risks of resource wastage (Paradza, Mokwena& Richards,
2010). Subsequently, saving costs subsequently translates into improved financial
capabilities of the municipalities to not only respond to their existing financial
obligations, but also the emerging future financial obligations.

However, some of the challenges affecting the improvement of the financial

sustainability of most of the municipalities are often still linked to the failure to create
a strategic fit between the municipal capabilities and the constantly changing socio-
economic trends. Hitherto, the contemporary South African societies are constantly
changing politically, economically and socially at the level that the municipalities
cannot easily match. Some of these forces are linked to changes in the political
setup that can cause the introduction of new ideologies and beliefs. These new
ideologies and beliefs can cause the introduction of new systems and thinking as
well as policy that do not influence municipalities to engage in constructive activities.
In this process, the politicisation of certain minor failures and challenges of the
municipalities have often caused service delivery riots and strikes that have
paralysed the effective performance of the municipalities (Plinio, Young &Lavery,
2010:172).

Some of these strikes and riots even cause damage on assets of the municipalities.
Quite often, these cause municipalities to have to re-plan how to fix such damages
using funds that could have been used for some other purposes. It is not only the
emergence of such circumstances that cause situations that undermines the drive for
improving the municipal financial sustainability, but also the fact that as such
challenges occur, most municipalities are rendered redundant. This affects the
extent to which the municipalities are able to design and complete different
development and revenue-generating projects on time. To avoid the frequent
emergence of such political scenarios, it is often important to constantly analyse and
sense the probability of the emergence of such risks and development of contingent
plans to deal with such challenges when they emerge. Although it is often easier to

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identify the symptoms of such volatile political changes, it is common for the
municipalities to avert all of them. In other words, this demonstrates the extent to
which the emerging new political changes and trends can cause the emergence of
new situations that affect the capabilities of most of the municipalities to effectively
deal with such new trends and dynamics.

6.2.4 Own Income Generation

It is the fundamental reasoning that financial sustainability of contemporary public
sector organisations depends on the extent to which they are able to generate own
income. This is attributable to the fact that financial sustainability of a public sector
organisation depends not only on how the existing public finances are effectively
utilised, but also on the generation of enormous new sources of income. The
embracement of pillar four that deals with the generation of own incomes therefore
supplements the utilisation of pillar two of financial sustainability that deals with
income diversification. In the application of pillar four, some of the sources of public
finances that have been invented include; the initiation of contributions to trusts or
endowment funds, fundraising for institutional building and operations, income
generation through public contributions, income generation by selling goods or
services, business developments, income generation by effective financial
management, and strategic partnerships and alliances with corporate.

In terms of trends on the initiatives undertaken to boost revenue generation by the

South African Department of Cooperative Governance and Traditional Affairs,
Section 151(3) of the 1996 Constitution of the Republic of South Africa requires
municipalities to constitute relevant structures which are not only critical for their
effective management and administration, but also for the delivery of critical socio-
economic services. Such socio-economic services include education, health, water
and sanitation and infrastructure essential for improving the attractiveness of the
municipality’s environment.

The other functions are linked to assisting low income households to access basic
services, sustaining the municipality’s operation, training and developing the
capacities of the officials to run the municipality more efficiently. However, to
accomplish these, funds provided by the central government remains the major
source funds for sustainably delivering on such functions. The funds provided by the

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central financial grant system are in line with the provision of Section 227 of the 1996
Constitution of the Republic of South Africa that prescribes that every municipality is
entitled to the share of national revenue so that they can be able to effectively
accomplish their various socio-economic services. However, as such funds are being
offered, the Division of Revenue Ac 2005 requires such funds to be equitably
distributed by national, provincial and local government. In effect, the amount that
each municipality obtains from the central grant system depends on the amount of
funds that it collects from its own sources. That implies relatively poor municipalities
with limited sources of revenues tend to get more funds as compared to the
municipalities in richer economic regions that tend to draw a lot of revenues from
their own sources. In addition to the amount of funds raised from own sources, the
other determinants of the amount of funds allocated to each municipality are often
linked to the low revenue municipality’s population size, the cost of basic services
and the extent to which the overall required expenditure of the municipality exceed
its revenues.

In the disbursement of relevant grants to the nine provinces and the 257
municipalities, the common types of grants that are offered include municipal
infrastructure grants (MIG), municipal urban settlements development grants,
municipal water infrastructure grant, national electrification programme grant,
municipal capacity building grant and rural households infrastructure grant. However
due to the emphasis of the developmental state approach to governance, most of the
socio-economic services such as education and healthcare are offered for free to the
citizens. The provision of these services for free even after 20 years of
independence places significant financial burden on the state.

Even if the local municipality was to place significant emphasis on revenue

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government, most of them are often not left with sufficient funds to invest in such
activities. Hence, the implications are often latent in the fact that economic activities
such as agriculture and tourism are not widely promoted amongst the population.
Such poor promotion affects the extent to which the majority of the people in rural
areas are able to engage in agriculture and tourism-related economic activities to
boost the economic performance of the rural municipalities.

Hitherto, as such poor economic performance of rural municipalities affect

generation of additional sources of income, the other major constraints of developing
financially sustainable local government have often been reflected poor capacity of
the municipalities to initiate and implement different socio-economic income
generating projects across different municipalities. Quite often, if such socio-
economic income generating projects are to be initiated, then the roles and functions
performed by councillors as community leaders are of critical significance. However,
it has often emerged that it is not only the challenges of lack of skilful leaders that
wards struggle with, but also lack of resources, training and equipment necessary for
the implementation of different community programmes. Limited financial resources
undermine the extent to which councillors and ward committees are able to
effectively accomplish different activities. This is attributable to the fact that most of
the councillors and ward committees operate without the existence of appropriate
infrastructure and housing as offices.

6.3 THREE FOUNDATIONAL CONSTRUCTS OF FINANCIAL SUSTAINABILITY

Three foundational constructs which would influence financial sustainability are
reiterated in Figure 1 to encompass financial risk management, financial governance
and financial ethical leadership.

6.3.1 Financial Risk Management

Financial risk management edifies the evaluation, identification and elimination of the
incidents or events that either render managers incur costs that would have been
used for some other projects or fail to achieve the desired financial goals and
objectives (Newell &Bellour, 2002). The contemporary notion of financial risk
management evolved from the ancient concept in which risk management took a
narrow perspective of only focusing on health and safety risks. As much as health
and safety risks are also associated with certain financial risks and implications, the

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introduction of the concept of the organisational-wide risk management has
influenced the evolution of a wider and an integral process of risk analysis,
identification and mitigation. In the undertaking of such an approach to financial risk
management, the other forms of risks that may also affect financial sustainability of
the public sector organisations are often linked to political risks, economic risks,
social risks, environmental risks and operational risks (Allwright, 2013; Arrowsmith,
2010; Barclay, 2013). However, findings imply that in most of the cases, poor
performance of the municipality that affects its financial sustainability tends to
emerge from the weaknesses of the oversight committees. The weaknesses of the
oversight committees to rubber stamp most decisions of municipal authorities may
affect vetting and analysis of the effectiveness of the process for the accomplishment
of different roles and responsibilities (The National Treasury, 2009; The Chartered
Institute of Internal Auditors-IIA, 2013; Van Niekerk &Visser, 2010:11).

It is the failure to effectively accomplish such roles that may affect the early
identification and mitigation of the variables that may affect good municipal
performance and financial sustainability. In effect, the effectiveness of the municipal
oversight roles and functions may be determined by factors encompassing the
effectiveness of the functions and roles performed by the internal political municipal
oversight committees such as the municipal public accounts committee, the
effectiveness of the functions and roles performed by the provincial and national
parliament’s oversight committees, the reporting functions of the municipal
management, the roles and functions performed by the auditor-general, and the legal
system of the country.

The internal political oversight committees such as the municipal public accounts
committee tends to offer support and veto of the powers exercised by the municipal
management authorities. This enhances the identification and remediation of the
anomalies arising from the decisions undertaken by the municipal managers during
the accomplishment of different functions. It is through such analysis that the
municipal oversight committees may be able to identify and eliminate wastes and
corruption incidents that affect the effective utilisation of the existing meagre
municipal financial resources (Beasley & Branson, 2008:46; Beasley, Branson &
Hancock, 2009:28; Borgelt& Falk, 2007:122). However, risks of collusion between
the political authorities in the municipal public accounts committee and those in the

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municipal management positions may still emerge to affect the overall effectiveness
of the process for holding the municipal managers accountable for the incidents that
may affect the financial sustainability of the municipality. This implies the intervention
of the provincial or national parliament’s public accounts committees may be critical
for supplementing the roles and functions performed by the municipal council’s
public accounts committees. Even in the events that all public accounts committees
are able to effectively exercise their oversight functions, Municipal Public Finance
Management Act still requires municipal managers to make the necessary reports
about their financial performance and the overall performance of the municipality.

6.3.2 Financial Governance

Public finance governance is significantly associated with ethics for the reason that it
seeks to develop and apply a financial management system that encourages
transparency, responsibility and accountability of public officials involved in the
generation and utilisation of public finances (Prat, 2005:862). Using a combination of
systems put in place, financial governance facilitates the use of a combination of the
proactive and reactive measures to influence the management of public finances.
The proactive measures are reflected in the emphasis of consultation and
involvement of different stakeholders in the financial decision making of the public
sector organisations. On the other hand, reactive measures entail having public
officials account for their financial decisions.

It is, therefore, certain that through the use of a combination of these proactive and
reactive financial control systems, the overall effectiveness of financial governance
edifies the improvement of the financial sustainability of the public sector
organisations. It prevents wrong financial decisions from being made which in
conjunction with the application of the other measures edify the elimination of wastes
and costs (Prat, 2005:862). All these translate into cost savings that in turn impact
positively on the increment of the financial bottom-line of the public sector
organisations. In other words, financial governance facilitates the development of
systems, control measures, financial risk management and behavioural change and
transformation that influence the reduction of the wastage of financial resources and
the improvement of the financial sustainability of the public sector organisations.

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However, limitations arise from the fact that in some of the cases, the poor
performance and the overall financial sustainability of most municipalities are linked
to the institutional weaknesses and poor capacity. Lack of personnel with the
necessary municipal management skills and experience often affect the
effectiveness of planning and budgeting. Some of these challenges are often linked
the required technical skills such as planning, engineering, project management and
plant operation. Such challenges may also arise from the inadequate capacity at the
senior management level and lack of financial management skills. These challenges
limit effective utilization of the existing meagre municipal financial resources to
influence the achievement of the desired outcomes (Olowu, 2012).

In effect, the local municipality and the government through Section 80 of the MFMA
require all municipalities to develop and establish the budget and treasury
departments headed by a chief financial officer working in conjunctions with the other
subordinates in that department to enhance effective accomplishment of all the
activities critical for edifying effective municipality’s financial performance. Although
the municipal budget and treasury department are usually charged with the roles and
functions of improving the municipal financial management capacities, constraints
still often arise from lack of experience, insufficient senior management staff to
groom the upcoming public finance managers, high levels of turnover among the
senior financial managers and the use of contracts that often expire.

However, it is still often critical that the development and establishment of the
municipal budget and treasury department is accompanied by the development of an
effective supply chain management system. It requires the establishment of an
effective supply chain management system which is accompanied by the
deployment and utilisation of the competent supply chain staffs. In effect, due to the
increasing cases of unethical and corrupt practices, the government is increasingly
seeking to improve the implementation and enforceability of the provisions of the
1996 Constitution on corrupt and unethical practices as well as the provisions of
legislations such as Local Government Municipal Structures Act No. 117 of 1998 and
the Municipal Systems Act No. 32 of 2000. Whereas Local Government Municipal
Structures Act No. 117 of 1998 requires councillors to comply with the established
code of conducts, the Municipal Systems Act No. 32 of 2000 introduces code of
ethics for all municipal officials. In case of breach of these code of conduct and code

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of ethics, some of the deterring actions may encompass disciplinary actions,
recovery of losses, prosecutions and sanctions.

However, poor enforceability of these codes is affecting the overall commitment of

the government to reduce the scale of the increasing spate of corrupt and unethical
practices across different municipalities (Corruption Watch, 2012; De Lange, 2011;
Equal Education, 2012). As these limit the initiatives for developing financially
sustainable municipalities, the other sources of wastes are arising from under-
utilisation of the allocated funds. Besides graft and corruption, the issue of poor
management often arises from the contractual human resource policies that are
used at the municipal levels. In all the municipalities, all the municipal managers are
employed according to contracts of five years. Although renewable, these contracts
often do not exceed two renewal terms, thereby undermining the extent to which the
municipalities are able to develop and retain some of the talented managers. These
restrictions in these contractual obligations affect the effective performance of the
municipalities on the basis that since municipal managers are only employed for a
certain period of time, it often affects their commitments and the efforts that they are
able to put to ensure that the desired outcomes are achieved.

In other words, the fact that managers are aware that they not employed
permanently affects their commitment. In most cases, more talented mangers tend to
initiate new projects that would turnaround the performance of the municipalities.
However, when their contracts expire and they leave the performance of the good
projects that they started tend to decline due to the fact that since such unique
projects will have been started as a result of their unique understanding of why such
a project is important, it often turns difficult for new incoming managers to take
forward such projects. In other words, contractual employment of managers often
affects most of the municipal mangers’ ownership and commitment towards the
initiated projects (Sandel, 2009:6).

Besides deficiency arising from the contractual employment of managers, the other
challenges also often arise from the difficulties of having to balance politics with
administration. In most of the cases, decisions on the projects to implement or not to
implement are often driven by politics. This affects thorough analysis and selection of
the most suitable projects that would catalyse revenue generation to spur the overall

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improvement of the financial sustainability of the municipality. If the challenges are
not arising from the contractual employment of municipal managers or the difficulty
to balance politics with municipal administration, challenges that can affect the
financial sustainability of the municipality may arise from poor governance. Poor
governance causing corruption and wastes of public resources often affect cost
savings and the preservation of financial reserves that would leverage the overall
improvement of the financial sustainability of the municipalities (Rosenbaum,
2014:19).

6.3.3 Financial Leadership

Financial leadership enhances financial planning and the mobilisation of relevant
resources which are investment in selected catalysing key economic activities to
spur improvement of the earning potentials of a government department (South
African Local Government Association-SALGA, 2012:19). Financial leadership not
only influences effectiveness of financial planning to achieve the desired long-term
goals and objectives, but also the development of goal practices and behaviours on
how the existing financial resources can be utilised in the way that facilitates
improved level of resource optimisation. This influences the development of a
practice where the government is not only concerned with how economise the
existing funds, but also how to generate additional revenues for the government
department (Thornton, 2009:58).

Although all these may spur improvement of the financial sustainability of the
government department, some authors still argue that the extent to which leadership
may influence improvement of a government department still depends on certain
critical pre-requisites such as long-term planning and commitment, leadership,
investment of sufficient time and money, the development effective development
plan, establishment of effective management team and use of teamwork as vehicles
for the achievement of the desired strategic objectives and goals (Thompson, Thach
& Morelli, 2010:107) .

Long-term planning and commitment are pre-requisites in the quest for improving the
financial sustainability of a government department. This is because, the quest to
attain financial sustainability is not an overnight endeavour, but an activity requiring
continuous long-term planning and commitment. Unfortunately, the failure of most of

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the government departments to achieve the desired state of financial sustainability is
linked to lack of long-term planning and leadership commitment (Steytler& De Visser,
2008:14). In most cases, leaders get distracted on the basis that when new events
emerge, there is often a shift of focus from the old plan to the old. Initiatives that
influence improvement of a government department’s financial sustainability require
resilience of the leadership. In the context of the trends on financial leadership in the
South African local government, the emergence of the concept of a developmental
state influenced the emergence of the need to strongly emphasise the need for
financial sustainability of the local municipality. The question of the developmental
state examined the extent of state involvement in the determination of the economic
and developmental direction of the South African economy (Walton, 2008:79). In this
regard, if the debate emphasized the stronger need for state involvement, then it
implies that the government would be required to provide various socio-economic
services to various segments of the population. To accomplish this, the government
would have to raise sufficient funds in conjunction with the undertaking of the
simultaneous measures that would leverage the optimisation of the existing
resources (Stefanick, 2013).

In contrast, if the government was to play only partial roles in economic development
of the economy, then, the financial obligations placed on it to meet different needs
would be reduced. However, considering the fact that the country was just emerging
from the ages of enormous discrimination and inequalities that affected a majority of
South Africans, the situation in which the government would play only limited roles
was the initiative that the South African government was unwilling to accept. These
debates are reflected in the Reconstruction and Development Programmes (RDP),
National Framework Agreement (NFA) and Growth, Employment and Redistribution
(GEAR).

The major argument in the Reconstruction and Development Programmes (RDP)

was for the establishment of a developmental state in which the government in
conjunction with civil societies plays significant roles towards determining the
economic direction of the country. In this, the government would be involved in the
provision of different services to an extent which is sufficient for affecting the redress
of the negative effects of the previous socio-economic inequities. In other words, all
these imply poor leadership and governance are some of the factors affecting the

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development of financially sustainable municipalities (Stefanick, 2013). This is
accentuated in the fact that poor leadership and governance causing corruption
affect the effective utilisation of the municipal financial resources to influence the
achievement of all the desired socio-economic outcomes. This increasing spate of
poor leadership and governance is caused by the increasing emergence of poor
ethical culture. As most senior leaders are accused of involvement in corruption, it
tends to affect the development of the organisational moral fabric that leverages the
overall leadership effectiveness. Quite often, these decaying morals are further
exacerbated by lack of ethical guidelines and poor enforceability of ethical breaches
that are all in turn causing loss of billions. This is accentuated in the Corruption
Watch Report (2015) that indicates that since municipal executive top management
officials are granted the mandate to determine their salaries, most of them have
been engaged in the unscrupulous acts of increasing their salaries up to about 50%.
Even in the midst of the Auditor-General’s Reports (2016) that about 14
municipalities have received unqualified reports, municipal managers receive about
ZAR950 000 and the Chief Financial Officer gets about ZAR900 000 excluding
benefits that make it total about ZAR 1.2million.

Besides bribery, extortion, embezzlement and graft, the other forms of corruption
have been latent in nepotism and patronage systems. Even though efforts are being
undertaken to overcome these corruption related challenges, the major stumbling
blocks are often linked to corruption, financial mismanagement and the appointment
of senior officials solely on the basis of political connectivity or employment equity
considerations. Besides the fact that municipal managers tend to be under-qualified,
but yet overpaid, Democratic Alliance’s (2010) report on corruption in South African
municipalities indicate that most of the corrupt transactions at the municipalities are
characterised by illegal tendering practices, unauthorised loans to councillors and in
certain cases, activities that equate outright looting. Even though due to these
corrupt practices, most irregular expenditures are often identified by the Auditor-
General, most of the Auditor-General’s recommendations are often not implemented.

6.4 THREE FOUNDATIONAL NON-FINANCIAL CONSTRUCTS OF FINANCIAL

SUSTAINABILITY

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There are three foundational non-financial constructs encompassing political
stability, fiscal and economic stability, forecasting and sensing to mitigate the
devastating negative effects of natural calamities and disaster.

6.4.1 Political Stability

Politically, trends in the South African local government indicate that the essence for
the development of a financially sustainable local government is strongly
emphasised in the 1996 Constitution of the Republic of South Africa. The 1996
Constitution of the Republic of South Africa requires the executive authorities in the
local municipality to devise and adopt means of delivering services to the population
within the designated locations in a way which is within the financial and
administrative capacities of the municipalities. Whilst using the limited resources and
the available capacity of the municipality, the 1996 Constitution of the Republic of
South Africa requires develop programmes that would aid the development and
entrenchment of a democratic and accountable system of government, and the
provision of services in the sustainable manner (Rhodes & Weller, 2005). The 1996
Constitution of the Republic of South Africa also requires the Department of Local
Government to develop and implement programmes that would significantly
influence improvement of the social and economic development of the country.

It is these quests to leverage sound financial management and financial

sustainability of the local municipality that were echoed in the Municipal Finance
Management Act (MFMA), No. 56 of 2003. In a bid to either fill the financial gap or
boost the capacity to implement all these programmes, the government either sold
some shares in state-owned enterprises such as Telkom and Transnet or engaged
public-private partnership. The implications are latent in the fact that although
Growth, Employment and Redistribution (GEAR) advocated for less state ownership,
but intervention to create conditions conducive for investments by the private sector
as the major stimulant for economic growth and development, the trends undertaken
since then has been skewed towards the establishment of a developmental state.

In the implementation of this developmental state, quests for new sources of

revenues as well as how to optimise the existing limited financial resources becomes
quite critical for determining the extent to which a government delivers on its socio-
economic objectives and goals. Since resource generation and optimisation are all

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critical constructs of financial sustainability, all these demonstrate the extent to which
the emergence of the notion of financial sustainability was spurred by the
establishment of a developmental state. In other words, the introduction of the
concept of a developmental state influenced the development of policies that in turn
renders South African to compare favourably in the BRICS region. This is
attributable to the fact that in terms of supportive policies, most of South Africa’s
policies strongly support business establishment and development. Despite such
positive policy approach, it seems only limited efforts have been committed towards
devising the strategies for responding to the complexities emerging from the
increasing rise in South Africa’s population growth. The increasing rise in the
population demographics is one of the drivers for the increasing emphasis of
financial sustainability in the South African local government.

Following the 1994 democratic dispensation, the South African government has
been experiencing significant increase in the number of the population. This is
mainly explained the fact that changes in the political system that ended the
apartheid system of government unlocked a significant number of the previously
restricted and discriminated population. This caused significant change in the
demands and needs of the population for socio-economic services such as
healthcare, education, infrastructure, housing and the accompanying services such
as water and electricity. To ensure consistently effective response to this
increasingly huge demand for socio-economic services, the government had to
consistently invest in the programmes that would leverage the improvement of
financial sustainability of the municipalities.

Through improved financial sustainability of the municipalities, the local municipality

and municipalities would be able to effectively respond to the array of different
demands and needs of the population for quality socio-economic services. As the
demand for socio-economic services rose as a result of the increase in population,
other complexities arose from the fact that the constantly changing nature of life and
thinking in the contemporary South African societies also influenced the emergence
of more complex needs and demands of the communities. This meant that local
municipalities had to not only offer basic healthcare and educational services, but
also quality socio-economic services. Government had to allocate more funds
towards the development of quality hospitals, education facilities, quality

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infrastructures, roads and amenities as well as the recreational facilities in the rural
areas. All these suggested that financial sustainability of the municipalities was going
to be a critical determinant of economic and political stability of the country.

Failure to effectively respond to not only basic socio-economic needs, but also
quality services would certainly infuriate the population. In effect, the essence for
improving the financial sustainability of the local municipalities and municipalities
became strongly emphasised with the effect that the municipalities that were unable
to do so faced the wrath from the population. It has been evident in recent years that
failure of the municipalities to plan and manage their finances to support the
development and delivery of all the required services can infuriate the population.
This can, in turn, cause service delivery unrests and riots that can affect the
economic and political stability of the country.

In effect, if the issue of financial sustainability is strongly emphasised, it can

influence the municipalities and the local municipality to constantly search for not
only the best ways to spend the existing financial resources, but also how to
generate new financial resources. The issue of service delivery had been estimated
since the new democratic system inherited underdeveloped and incapacitated
municipalities that were designed to serve only a few segment of the population.
Hence, since the 1994 democratic dispensation, stronger quests have been directed
towards evaluating how best to effectively respond to the diverse socio-economic
needs and demands of the now more diverse and extensive South African
population.

Hence, the improvement of the financial sustainability of the contemporary

municipalities has been one of such initiatives. In other words, this is attributable to
the fact that sudden increment in the previously unplanned population demographics
affected the limited capacity of the municipalities and the limited resources to
effectively respond to the new socio-economic demands and needs of the
population. As this instigated the need for the local municipality to explore new ways
of meeting such needs and demands, it also instigated the need for the
municipalities and the entire local government system to be developmental.

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6.4.2 Fiscal and Economic Stability
The attractiveness of the South African economy as well as the extent to which it
leverages South Africa’s financial sustainability is linked to strong control of inflation,
interest rates and exchange rates. As a result of well-developed and sound fiscal
framework, inflation is often effectively controlled. Higher inflation affects the stability
of prices as well as prices of inputs. Inflation also affects demand on the prices that
as the prices of inputs increase; businesses also tend to increase prices of finished
products that in turn also cause the demand of most products with elastic demand to
fall. However, with strongly controlled inflation, businesses operating in the South
African markets have been able to gain from relatively stable prices of input. This
influences business certainties as well as future certainties in terms of the projected
revenues. The same levels of control have also been exercised with regards to
interest rates of which lower interest rates have contributed to lowering the cost of
capital to spur the overall decline or stability of the cost of capital for businesses that
rely on borrowing from different financial institutions. As such trends suggest the
overall attractiveness of the South African economy, the other positive aspects of the
South African economy has been reflected in foreign exchange controls. Even
though all the other sectors are liberalised, the South African foreign exchange
market has not yet been liberalised. In effect, foreign exchange transactions are
strongly regulated and controlled. Although such approach causes difficulties that
businesses experience when undertaking different foreign exchange transactions,
the positive effects have been reflected in the improved controlled of foreign
exchange rates. This contributes enormously to protecting the rand from devaluation
and depreciation against the dollar.

For businesses that rely on exports, this may affect the prices of their products in the
world market as compared to businesses that rely on imports of critical inputs. In
other words, despite certain limitations, this strongly controlled inflation, interest rates
and exchange rates seems to have contributed to have created a vibrant economy
that leverage the overall level of opportunities that businesses are exposed to. Yet,
in addition to these attractive signs has been government initiatives to increase and
expand the South African market by not only cooperating with regional bodies such
as AGOA, but also BRICS and SADC (Southern Africa Development Corporation)
economies. These initiatives have influenced the expansion of the South African

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market on the basis that as South African businesses exploit SADC markets; they
also tend to use it as the path to the larger African market. Even if all these imply that
enormous opportunities exist in the South African markets, there are also risks.

The risks are linked to the fact that as the boom in the South African markets fuel
increasing attraction of different businesses, challenges have also been reflected in
the increasing competition and volatilities of the South African markets. For
businesses investing in South Africa, this points to the adoption of the appropriate
strategies is critical for leveraging their sustainability. However, as government
continues to invest in critical socio-economic projects, the implications are often
latent in the improvement of the standards and conditions of living of the population.
In the long run, this may impact on the reduction of the education and health
expenditures that the government has got to incur. This suggests that billions of
savings may be realized and invested in the other priority areas. As cost savings are
realized, the other values arising from the implementation of the national
development plan may also arise from the generation of the additional sources of
new revenues.

Additional sources of new revenues may arise from the fact that as the government
invests in the critical economically catalysing activities, the implication may boost the
overall economic activities. This expands the overall taxable base that in turn would
generate enormous revenues for the local municipality. The national development
plan is not just a strategic plan, but a policy document that aims to introduce radical
change and transformation in the way the activities are accomplished. It agitates for
the change and transformation of our national developmental activities are
accomplished to create not only government projects, but also favourable investment
conditions for businesses.

It is through such an approach that the national development plan would catalyse the
generation of new sources of revenues to impact positively on the financial
sustainability of the local municipality. To achieve this, the national development plan
is being implemented according to three main phases that will span over 17 years.
The first stage refers to the critical activities undertaken in 2013 to unlock NDP
implementation. These critical stages encompass the development and
implementation of programmes that do not require additional resources and long

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lead times, focusing developing compatible policies and review of the existing
policies, and dialogue and negotiations to minimise risks that often constrain the
implementation of most government programmes. With good conditions created by
these initiatives, the second phase of NDP implementation has involved planning
cycle being undertaken in the period between 20214 and 2019. It is through these
planning cycles that initiatives will be undertaken to ensure that the goals and
objectives of NDP are advanced at all levels.

These planning cycles and the associated activities will be further spurred by the
activities that will be accomplished in the third phase of the process for NDP
implementation that will be undertaken in the periods between 2019-2024 and 2024-
2029. It will also require the integration of all the critical activities outlined in the
national development plan into the government plans and the processes of planning
at all levels of government. It is through integration of the national development plan
into the required critical activities that the government would be able to cascade all
the expectations in the NDP to the local government and municipal levels. This
would be edified by the adherence to the critical principles of NDP implementation
that include broad ownership, continuous capacity building, policy consistency,
prioritization and sequencing, clarity of responsibility and accountability, continuous
learning and improvement, and coordinated actions.

Even if adherence to these critical principles would edify the successful

implementation of the national development, it is still critical to create additional
conditions for NDP implementation. Such conditions would require breaking the plan
into manageable chunks, developing detailed planning programmes, building on
broad support for the programme, building trust and confidence among key players,
strengthening public sector capacity and streamlining accountability and reporting
procedures.

However, in addition to the development of the appropriate conditions for NDP

implementation, it is also critical to develop appropriate financing models outlining
the critical sources of funding for the implementation of different NDP programmes.
Some of these sources of funding may significantly entail use of government grants,
donations or funds obtained through partnerships with the international development
communities and other non-governmental organisations.

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6.5 MEASURING THE MATURITY OF LOCAL GOVERNMENT FINANCIAL
SUSTAINABILITY
As the application of such integrated constructs influence improvement of financial
sustainability, it is still often critical that an appropriate framework is developed to
evaluate the overall maturity of the financial sustainability of the local municipality
according to four perspectives that include liquidity, resilience, service and fiscal
responsibility, and public confidence. This must also be accompanied by the
application of five spectrums aligned to Birney et al.’s(2010:7) five spectrums of a
government’s financial sustainability that include: at risk, compliance-based,
incremental, strategic and systematic.

6.5.1 Four Perspectives (Liquidity, Resilience, Service & Fiscal

Responsibility, and Public Confidence) Of Local Government Financial
Sustainability
In terms of these four perspectives of local government financial sustainability,
PFMA and MFMA do not only emphasise the need for monitoring and evaluation, but
also the importance for the level of financial optimisation to be influenced by an
effective budgeting and financial planning. It is through financial budgeting and
planning that the local municipality would not only be able to eliminate wasteful
expenditures, but also to optimise the limited resources to meet as an array of
different needs as possible. Financial optimisation, as required in these legislations,
significantly impacts on cost savings to leverage the overall level of funds that
municipalities are able to retain as their financial reserves.

It is the amount the municipality has in its financial reserves that influences its
financial sustainability. This is because it is through such financial reserves that the
municipality is able to demonstrate their capabilities to meet the present as well as
future needs. This view is strongly recognised in PFMA and MFMA that financial
sustainability is not only achieved by generating new sources of revenues, but also
through minimisation of the existing funds in the way that leverages cost savings and
increment. However, as Section 196 of the Constitution of the Republic of South
Africa, in conjunction with the provisions of PFMA and MFMA, agitate for financial
optimisation, the effects are not only reflected in the need for improved monitoring
and evaluation but also in the importance for intense financial risk analysis and
mitigation.

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These legislations advocate for effective financial risk management as one of the
strategies for identification and mitigation of risks that cause financial wastes.
Financial risk management refers to the process of analysing, identifying and
mitigating of the wastes that would affect financial sustainability. Increased levels of
financial wastes affect the amount of funds that a municipality is able to retain in its
reserves. This subsequently affects the extent to which a municipality is able to
retain as adequate funds in its reserve to enhance the effective meeting of the needs
of the present as well as the future generation.

In a bid to entrench a culture of financial risk management, the Constitution impliedly

bestows on the directors and managers in public departments the mandate to
exercise the necessary due diligence to ensure that all the implemented government
projects and programmes achieve the desired strategic objectives and goals (The
Public Service Commission, 2011:66). At the same time, while deriving from Section
196 of the South African Constitution, the roles and responsibilities for the
implementation of a risk management strategy in all the modern South African public
sector organisations is now contained in the regulations published in terms of the
Public Finance Management Act (PFMA), 1999 and later amended by the National
Treasury’s (2009) Framework for Risk Management in public sector organisations.

The National Treasury’s (2009) framework for risk management agitates for the
creation of an enabling environment for risk management by adopting the
appropriate risk management strategy, human resource capacity, and the use of the
enterprise risk management framework. It also emphasizes the need for risk
identification, risk assessment, risk response, communication and reporting,
monitoring, and the key roles and responsibilities of the risk management
committees and audit committees. Thus, in the exercise of such stringent financial
controls and oversight functions, the Municipal oversight committees also constitute
some of the bodies that exercise roles.

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are effectively utilised in the accomplishment of the activities for which they were
dedicated.

In effect, the municipal oversight committees not only check the effectiveness of the
budget and financial planning processes, but also how effectively such budgets and
financial plans are implemented. This eliminates risks of deviating from the
prescribed plan to influence the extent to which the allocated resources are
effectively optimised. However, the effective exercise of some of these roles is often
constrained by the poor skilfulness of the councillors that mainly constitute most of
the members sitting in the municipal oversight committees. Although such limitations
affect the effectiveness of the financial control and oversight roles exercised by the
municipal oversight committees, it is still evident that the roles and functions
exercised by the municipal oversight committees often still impact positively on cost
savings and waste minimization. As it is such an improved level of financial
resources’ optimisation that leverages the level of the financial reserves that a
municipality has, the other significant roles undertaken towards leveraging financial
sustainability in the local government sphere has been emerging from the roles
accomplished by the Office of the Auditor’s General. Since 1994, the Office of the
Auditor-General has been performing a number of functions critical for bolstering the
level of financial optimisation in the local government sphere. The Office of the
Auditor-General performs the monitoring functions and frequent audit that aid the
detection and mitigation of the areas of wastes.

6.5.2 Five Spectrums (At Risk, Compliance-Based, Incremental,

Strategic, & Systematic) of Local Government’s Financial
Sustainability
Birney, Clarkson andTuxworth’s (2010) spectrum of public sector leadership on
sustainable development argue that the maturity of the financial sustainability
leadership of a government department is best measured by the assessment of five
main levels encompassing at risk, compliance, incremental, strategic and systematic.
At risk is the weakest point of the stage of developing a financially sustainable
government department. At risk stage is often characterised by limited concerns of
the leaders about the essence for the development and improvement of financial
sustainability. Instead, most leaders of the government department which is at the at-

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risk stage often tend to focus on planning and budgeting that does not integrate
investment to stimulate alternative sources of revenues.

Without considering investments that stimulate the development of alternative

sources of revenues, it is often not easier to attain financial sustainability. This is
because financial sustainability is more associated with the extent to which a
government department has an array of different sources of financial resources that
the department can effectively use to meet the present obligations as well as future
obligations without borrowing from other sources. Since at this level, financial
sustainability is not widely considered by the managers, quite often, it is also evident
that it does not feature in most of the plans and policies of the government
department.

However, the stage of at-risk level is significantly different from the other stages such
as the compliance level. At the compliance level, there is often the beginning of the
executives to recognise the values and importance of developing a financially
sustainable public sector organisation. In effect, as compared to the first stage, the
notion of financial sustainability gets mentioned and integrated quite frequently in the
plans, policies and the strategies of the departments. Even in the budgeting
processes, financial sustainability issues may emerge from the deliberations of the
executive. At the incremental level, there are stronger recognitions of the importance
of financial sustainability. In effect, the executives in that particular government
department may tend to be innovative by conducting frequent analysis to identify the
improvement initiatives that can be undertaken to bolster the financial sustainability
of a government department.

At the strategic level, the notion of financial sustainability is deeply entrenched

through the different levels of government with the effect that all the politicians and
top government officials frequently include it in their campaign manifestos. As
financial sustainability is strongly emphasised in the strategic plans, integrated
development plans and the campaign manifestos, the government also continuously
campaign and advocate for resource optimisation and implementation of projects
that bolster increment in the sources of revenues. Some of the strategies may
involve hiring process improvement consultants to conduct relevant analysis and
improve the operational processes using methodologies such as sigma analysis,

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benchmarking, process evaluation and re-engineering and service quality analysis
and improvement. At the systematic level, the concerns for improving financial
sustainability often get entrenched as part of the organisational culture.

Since, the drive to improve financial sustainability is part of the organisational

culture; there is often a stronger drive of the executives to integrate sustainability as
part of the critical goals that the government department strives to achieve. However,
from the analysis of the findings, the state of financial sustainability in the South
African local municipality seems to be at risks as contrasted with the other levels
such as compliance, systematic and strategic levels. This is attributable to the fact
that findings revealed that despite enormous initiatives undertaken to leverage
financial sustainability in the South African local government, major inhibitors of the
initiatives for improving financial sustainability in the South African local government
often arise from inadequate municipal capacity, limited income generating activities,
deficient local government procurement system and poor leadership and
governance. In terms of inadequate municipal capacity, some of the challenges
affecting the improvement of the financial sustainability of most of the municipalities
are often linked to the failure to create a strategic fit between the municipal
capabilities and the constantly changing socio-economic trends.

Nonetheless, contemporary South African societies are constantly changing

politically, economically and socially at the level that the municipalities cannot easily
match. Some of these forces are linked to changes in the political set up that can
cause the introduction of new ideologies and beliefs. These new ideologies and
beliefs can cause the introduction of new systems and thinking as well as policies
that do not influence municipalities to engage in constructive activities.

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municipal financial sustainability, but also the fact that as such challenges occur,
most of the municipalities are rendered redundant.

This affects the extent to which the municipalities are able to design and complete
different development and revenue-generating projects on time. This is echoed in the
fact that although the funds granted by the government are often enormous, the
challenges faced by the municipalities are often also enormous. New changes keep
on emerging as the existing challenges turn complex. This makes it difficult for the
municipalities to adopt effective financial control strategies that would leverage their
financial sustainability.

Yet, as much as most of government policies and legislations emphasise the

importance for effective financial management in the local government sphere, only
limited emphasis seems to have been placed on the generation of additional sources
of revenues. This limits the generation of additional revenues that can be used to
finance different government socio-economic projects. Therefore, it is the
fundamental argument in the financial sustainability literature that financial
sustainability of a government department depends on the availability of different
sources of funds. That implies reliance on only a few sources of income for the
government department can undermine the extent to which it can be sustainable in
the future. In other words, all these tend to undermine the development of financially
sustainable municipalities. Besides these challenges, other exacerbating challenges
are linked to the use of deficient local government procurement systems.

Local government sphere’s procurement process is a critical determinant of cost

savings which subsequently impacts on the financial reserve that a municipality
holds. It influences the successful implementation of different projects as well as the
ability to gain from the competencies and capabilities of different suppliers. It also
bolsters the selection of competent and quality suppliers, and cost minimisation
resulting from the elimination of the risks of the selection of less competent suppliers.

All these subsequently impact positively on the capabilities of the local municipality
to not only optimise the existing financial resources, but also to generate new
sources of revenues. Unfortunately, the ability to gain from such values has often
been affected by risks arising from frequent flouting of the critical processes for
effective local government procurement. Key processes used in the procurement

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process by the local government sphere may entail defining of the procurement
objectives, advertisement of bids for tenders of the potential suppliers, identification
of the potential suppliers, interview and selection of the potential suppliers, training
and building of the competencies of suppliers, managing the procurement process,
as well as monitoring and evaluation to improve the overall effectiveness of the
procurement process.

In other words, all these tend to limit the extent to which procurement processes are
able to enhance the optimisation of the existing financial resources whilst also
facilitating the development of socio-economic projects that create new sources of
revenue. All these are exacerbated by poor leadership and governance which are
some of the factors affecting the development of financially sustainable
municipalities. This is accentuated in the fact that poor leadership and governance
causing corruption affect the effective utilisation of the municipal financial resources
to influence the achievement of all the desired socio-economic outcomes. This
increasing spate of poor leadership and governance is caused by the increasing
emergence of poor ethical culture.

As many senior leaders are perceived to be involved in corruption, this tends to

affect the development of the organisational moral fabric that leverages the overall
leadership effectiveness. Quite often, these decaying morals are further exacerbated
by lack of ethical guidelines and poor enforceability of ethical breaches that are all in
turn causing loss of billions. This is accentuated in the Corruption Watch Reports
(2015) that indicate that since municipal executive top management officials are
granted the mandate to determine their salaries, most of them have been engaged in
unscrupulous acts of increasing their salaries up to about 50%.

Even in the midst of the Auditor-General’s Reports (2016) that about 14

municipalities have received unqualified reports, municipal managers receive well
above ZAR950 000 and the Chief Financial Officer gets around ZAR900 000
excluding benefits which total about ZAR 1.2million. Besides bribery, extortion,
embezzlement and graft, other forms of corruption have been latent in nepotism and
patronage systems. Even though efforts are being undertaken to overcome these
corruption related challenges, the major stumbling blocks are often linked to
corruption, financial mismanagement and the appointment of senior officials solely

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on the basis of political connectivity or employment equity considerations. In other
words, all these imply the state of financial sustainability in the South African local
municipality seems to be at risks as contrasted with the other levels such as
compliance, systematic and strategic levels.

6.6 CONCLUSION
It is evident from the analysis of the findings that despite various socio-economic
initiatives undertaken to leverage financial sustainability of the South African local
government, the state of financial sustainability in the South African local municipality
seems yet to be at risks as contrasted with the other levels such as compliance,
systematic and strategic levels. In effect, the general conclusions and
recommendations of the study are presented in the next chapter with the overall
motive of identifying a new model on financial sustainability which can be extracted
and proposed for improving the financial sustainability of the South African local
government.

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Chapter 7

CONCLUSIONS AND RECOMMENDATIONS

7.1 INTRODUCTION
The discussions in this chapter offer the general conclusions and recommendations
of the study.

7.2 CONCLUSIONS
Financial sustainability of the local municipality is critical for leveraging the overall
effective performance of an economy. The local municipality is central and key to the
process for effective implementation of different socio-economic projects in an
economy. This implies that as effective performance of the local municipality impacts
positively on the performance of the local municipalities, it also tends to cause
significant overriding positive socio-economic impacts that leverage effective
performance of a country’s entire economy. In effect, the financial sustainability of
the local municipality is central for a government to meet its present as well as future
financial obligations.

The essence for the development of a financially sustainable local government is

strongly emphasised in the 1996 Constitution of the Republic of South Africa. The
1996 Constitution of the Republic of South Africa requires executive authorities in the
local municipalities to devise and adopt means of delivering services to the
population within the designated locations in a way which is within the financial and
administrative capacities of the municipalities. Whilst using limited resources and the
available capacity of the municipality, the 1996 Constitution of the Republic of South
Africa requires develop programmes that would aid the development and
entrenchment of a democratic and accountable system of government, and the
provision of services in the sustainable manner.

The 1996 Constitution of the Republic of South Africa also requires the department
of local government to develop and implement programmes that would significantly
influence improvement of the social and economic development of the country. It is
these quests to leverage sound financial management and financial sustainability of
the local municipality that were echoed in the Municipal Finance Management Act
(MFMA), No. 56 of 2003. In other words, most regulatory reforms that were

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introduced by the government to enhance effective financial management and
sustainability of the contemporary municipalities and local municipalities are
anchored in the Municipal Finance Management Act (MFMA), No. 56 of 2003.

The motive for the introduction of the MFMA was to promote sound financial
management as the source of long-term financial sustainability at the local
government level. Sound financial management refers to the extent to which
financial decisions are based and guided on sound financial management principles
of equity, honesty and transparency to ensure that the allocated financial resources
influence the achievement of the outcomes for which they were intended. It aids the
reduction of wastes and corruption that cause loss of funds aimed for financing
different projects. To achieve this, the Municipal Finance Management Act
emphasises the need for integrated planning and budgeting, revenue, cash and
expenditure management, procurement, asset management, reporting and
oversight.

To develop sound municipal finance management system, the Municipal Finance

Management Act agitated for the change and reforms of the municipal finance
management practices, sound financial management as key to leveraging the long-
term financial sustainability of the municipalities, strengthening oversight through
improved transparency and accountability for the undertaken financial decisions, and
institutional strengthening and capacity building. In other words, as the Public
Finance Management Act agitates for the development of a sound municipal finance
management system, SALGA funding model and fiscal framework and financial
management emphasises a joint and cooperative funding model as the strategies for
edifying the improvement of the financial sustainability of the local municipality.
SALGA aids resource mobilization and sharing across the municipalities.

Through the cooperative framework offered by SALGA, it often becomes easier for
different municipalities to gain from the unique competencies and capabilities of
more powerful and resourced municipalities. Through this, SALGA enhances not
only efficiency of local government operation, but also cost sharing that minimises
the overall cost of operation. It is through such an approach that, when combined
with joint planning and budgeting, SALGA also influences the improvement of the
financial sustainability of the local municipality. However, the challenge with SALGA

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funding model is that it is not sustainable. This is further aggravated by the fact that
the contributions from the municipalities tend to be quite limited for SALGA to
effectively meet its developmental obligations. The implications are often reflected in
the fact that most of the collected funds are often only used for administrative
purposes and not in the developmental activities that would generate further sources
of revenues for SALGA. It, therefore, suggests that even if appropriate local
government procurement framework is adopted, it may not contribute much towards
aiding the improvement of financial sustainability of the local municipality.

Procurement is one of the areas that have been significantly reviewed and regulated
in the contemporary South African local government as a strategy for enhancing cost
savings and financial sustainability of the municipalities. This is attributable to the
fact that it is through procurement that the municipality is able to control the cost of
materials and inputs. This significant improvement of cost control leverages the
improvement of the extent to which the municipality is able to utilize and optimise the
limited financial resources to finance the implementation of as an array of municipal
programmes as possible.

Even if the introduction of the national development plan was aimed at creating
projects that boost economic growth and development to create new sources of
revenues, it is quite evident that quite often governance and ethical challenges have
affected the effective utilisation of the available financial resources to aid the
implementation of an array of different government programmes and projects. The
national development plan offers critical strategies for the development of a
sustainable South African government. It outlines critical priorities and directions that
would influence the guide the local municipalities and municipalities on the directions
and critical activities that they must be accomplish to become wholly sustainable.
These critical priorities and directions are reflected in the national development
plan’s strategic plan that serves to achieve four broad objectives encompassing the
provision of the main goals that the South African government aims to achieve by
2030, building key obstacles to the effectiveness of the process for the
implementation of the national development as well as the other critical strategies
that can be used to overcome such obstacles.

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The implementation of such strategies have been accompanied by the use of
financial sustainability models and methods that include central financial grant
system, SALGA’s model for financial sustainability, investment in revenue-generating
activities and managing municipal operational efficiency as a driver of cost
minimisation. However, theories imply for financial sustainability to leverage effective
performance of a government department, it is common across the views of several
scholars that the development and improvement of the sustainability of the
contemporary public sector organisations is predicted by the use of the strategic
cyclical financial sustainability framework that entail environmental analysis,
identification of the sources of revenues and revenue generation, managing the
utilisation of the generated revenues, and monitoring and evaluation.

The effectiveness of financial sustainability is also predicted by the effective use of

the models such as four pillars of financial sustainability, five capitals’ theory of
financial sustainability, and the three foundational constructs (financial risk
management, financial governance & financial leadership) of financial sustainability.
In other words, it is evident from these theories that the development of three
foundational constructs of financial sustainability that encompass financial risk
management, financial governance and financial leadership creates pillars that
influence the development of a financially stable and sustainable government
department.

Although such measures appear akin to some of the strategies being used in the
South African local government, findings still revealed that despite various socio-
economic initiatives undertaken to leverage financial sustainability of the South
African local government, the state of financial sustainability in the South African
local municipality seems yet to be at risk as contrasted with the other levels such as
compliance, systematic and strategic levels. This is attributable to the fact that
findings revealed that despite enormous initiatives undertaken to leverage financial
sustainability in the South African local government, major inhibitors of the initiatives
for improving financial sustainability in the South African local government often still
arise from inadequate municipal capacity, limited income generating activities,
deficient local government procurement system and poor leadership and
governance.

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Such findings seem consonant with theoretical findings that signified the major
paradoxes of financial sustainability in the contemporary public sector organisations
are often associated with poor analysis and identification of the level of financial
sustainability maturity, lack of suitable government financing models, poor strategic
financial planning and budgeting and lack of effective models for managing equity.
To address these inhibitors of local government financial sustainability, it is argued in
the recommendations that the South African local municipality must consider
adopting and applying the conceptual model for local government financial
sustainability suggested in Figure 1.

7.3 RECOMMENDATIONS
Drawing from these findings, it is argued that it is critical that the department of local
government adopts and applies the local government financial sustainability model
akin to the conceptual model suggested in Figure 1. The application of such a model
would require use of the strategies described below.

7.3.1 Four Main Pillars (Strategic Financial Planning, Income

Diversification, Sound Financial Administration and Management,
and Own Income Generation) for Local Government Financial
Sustainability
As it is illustrated in Figure 3, strategic financial planning is one of the four pillars that
the local municipality will have to consider in the initiatives for developing a
financially sustainable local government. The development of an effective strategic
financial plan will clarify the direction and the critical activities that the local
municipality will have to accomplish to develop a financially sustainable local
municipality. To achieve that, the process of strategic financial planning will require
the application of four steps encompassing environmental analysis, setting of the
financial sustainability goals and objectives, developing and applying the strategies
for leveraging local government financial sustainability and evaluation and
undertaking the necessary corrective improvement measures.

Environmental analysis would entail the analysis of the changes in trends such as
population growth as well as the likely present and future expenditures. As this
analysis aids the understanding of the extent to which the generated revenues will
be adequate for financing all the governmental needs, it is also critical to assess the

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adequacy of the existing sources of funds. This must be accompanied by the
analysis of the new sources of funds that more investments need to be committed
on. Setting of the financial sustainability goals and objective would require the setting
of goals that involve outlining the time period against which significant local
government dependence on debts and borrowing will be completely eliminated. On
the other hand, developing and applying the strategies for leveraging local
government financial sustainability would require the development of a combination
of government businesses in conjunction with commercial activities undertaken
through public-private initiatives to boost the overall level of revenue generation.

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Figure 3.1: A Conceptual Model on Financial Sustainability of the South African
Local Government

Source: Authors’ Interpretation and Conceptualisation of theories on Financial

Sustainability in the South African Local Government

The implementation of such strategies must be accompanied with constant

evaluation and application of the corrective improvement measures to ensure that

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the objectives and goals of developing a financially sustainable local government are
achieved. The development and application of such a strategic financial plan must
be accompanied by investment in the activities that facilitate income diversification.
Income diversification is the second pillar for local government financial
sustainability. Income diversification would require local government not only to
depend on central government grants, borrowing and donations, but also on the
incomes generated through investment in the required critical commercial activities.
Part of such initiatives for income diversification may require local municipalities to
invest in the development industrial, commercial and residential properties that can
be rented out.

However, as enormous funds and revenues are generated, it is critical to note that
sound financial administration and management is of essence for eliminating wastes
to leverage the maintaining of the overall financial sustainability of the local
municipality. Yet, as the local municipality invests in income diversification, it is also
likely that it would bolster own income generation as the fourth pillar for financial
sustainability. Although these four pillars would create foundations that spur the
improvement of the overall local government financial sustainability, it is still critical
that it is accompanied by certain three foundational constructs of local government
financial sustainability.

7.3.2 Three Foundational Constructs (Financial Risk Management,

Financial Governance and Financial Ethical Leadership) for Local
Government Financial Sustainability
The critical three foundational constructs for local government financial sustainability
include financial risk management, financial governance and financial ethical
leadership. The development and application of the appropriate financial risk
management framework would aid the ability of the local municipality to easily
identify and mitigate risks that would inhibit the development of a financially
sustainable local government. To identify and mitigate such risks, the process of
financial risk management requires the application of four main steps that include
risk analysis, risk identification, risk quantification, risk mitigation and monitoring and
evaluation. Risk analysis will enable thorough analysis and identification of risks
such as corporate governance risks, procurement risks, and corruption and unethical
practices. This leads to the quantification of the effects of such risks on the

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performance of the local municipality as well as its financial sustainability. As such
devastating effects of the identified risks are evaluated; appropriate risk mitigating
measures must be developed and applied to ensure that the identified risks are
mitigated. Some of the mitigating measures may just require enforceability against
unethical and poor governance practices and acts committed by the municipal
authorities. In other words, this certainly implies the development and use of the
appropriate financial governance framework is critical. To accomplish that, the local
municipality will have to develop a financial governance board and allocate
responsibilities to each member. This must be accompanied by the initiatives for
encouraging transparency and accountability when all financial decisions are being
undertaken. This will certainly enhance the identification and elimination of
governance related challenges that may affect financial sustainability of the local
municipality.

Even though the development of an effective financial governance framework

leverages the entrenchment of good ethical practices, it is still critical that initiatives
are also directed towards creating a more ethical financial leadership in the local
municipality. Part of the strategies for accomplishing this would require leaders to
live by example by avoiding engagement in all activities that may affect the
confidence and trust of the employees about leadership’s commitment to fight and
mitigate financial wastes. The other strategy would require the development and
enforcement of compliance with financial ethics code. The code of conduct can be
set in areas such as salary determination, procurement, the allocation of benefits to
staffs and the process for the implementation of different infrastructural projects.
Certainly, these three constructs of local government financial sustainability lays the
foundation for effective financial control and management. However, it is still critical
that it is accompanied by the development and use of certain three non-financial
constructs for leveraging local government financial sustainability.

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7.3.3 Three Foundational Non-financial Constructs (Political Stability,
Fiscal and Economic Stability, Forecasting and Sensing to
Mitigate the Devastating negative effects of Natural Calamities
and Disaster) for Local Government Financial Sustainability

The three foundational non-financial constructs for local government financial

sustainability encompass political stability, fiscal and economic stability, forecasting
and sensing to mitigate the devastating negative effects of natural calamities and
disaster. In this initiative political stability is important for leveraging the overall
financial sustainability of the local municipality. This is attributable to the fact that
local government financial sustainability is not only influenced by the effective
management of the internal financial activities, but also by identification and diffusion
of the threats emerging from the external business environment. Part of such forces
prevailing in the external business environment may include political instability and
uncertainties that affect the generation of new sources of revenues as well as the
effective utilisation of the existing sources of revenues. In effect, the local
municipality must contribute to create more political stable environments.

This can be accomplished by developing strategies through which newly emerging

political uncertainties are identified and resolved before they occur. It may also
require consistent response to the needs and demands of different segments of the
population. This is attributable to the fact that failure to respond to such needs and
demands are often the sources of disputes that cause riots and strikes. Riots and
strikes destroy municipal property. It also causes the diversion of funds to meet other
needs for which they were not planned for. In effect, the development of policies that
create political stability and certainty is critical for leveraging the overall financial
sustainability of the local municipality.

However, for such policies to bolster the financial sustainability of the local
municipality, it must be accompanied by the policies that encourage the generation
of new sources of revenues as well as the creation of attractive conducive
investment environments for different businesses. The development and application
of such favourable political policies must be accompanied by the development and
use of more stable fiscal and economic policies. Fiscal and economic policies that

224 | P a g e
control interest rates, exchanges and inflation must be directed towards creating
more attractive investment conditions for businesses. Increased business attractions
leverage the amount of revenues that the municipalities are able to collect. However,
since, most of the rural municipalities are struggling to collect sufficient revenues, the
development and application of such fiscal and economic policies must be directed
towards assessing how the economic performance of rural municipalities can be
boosted through boost agricultural and tourism related activities. In other words, all
these suggest that the overall level of political and economic stability determine the
overall state of the financial sustainability of the local municipality. However, to
further avoid sudden events that may emerge to disrupt the overall initiatives for
improving local government financial sustainability, frequent forecasting and sensing
of the likelihood of the occurrence of events such as natural calamities must be
undertaken.

This would enable municipalities prepare to tackle the effects of such events with
minimal disruptions of the activities that determine their financial sustainability. In
other words, all these imply the three foundational non-financial constructs for local
government financial sustainability are critical for creating political and economic
conditions that bolster the overall financial sustainability of the local municipality.
However, as a number of measures for leveraging financial sustainability are being
undertaken, it is still critical that such initiatives are accompanied by the development
and use of appropriate measures for testing the maturity of the local government
financial sustainability.

7.3.4 Measuring the Maturity of Local Government Financial

Sustainability
In the context of the illustration in Figure 3, measuring the overall maturity of the
financial sustainability of the local municipality would require the use of the four
perspectives (liquidity, resilience, service and fiscal responsibility & public
confidence) of local government financial sustainability in conjunction with the five
spectrums (at risk, compliance-based, incremental, strategic & systematic) of local
government financial sustainability. The details of how the local municipality can
apply these measures are explained as follows.

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7.3.5 Four Perspectives (Liquidity, Resilience, Service & Fiscal
Responsibility, and Public Confidence) of Local Government
Financial Sustainability
The four perspectives would explore the liquidity, resilience, service and fiscal
responsibility and public confidence of local government financial sustainability.
Liquidity would evaluate the extent to which the local municipality has sufficient cash
to meet its present needs as well as future needs and demands. This is attributable
to the fact that financial sustainability of the local municipality is not only measured
by the extent to which it has adequate cash to meet the present obligations, but also
the extent to which it has sufficient cash to meet all the future eventualities. That
implies in terms of the sources of funds, it must be able to have sources that boost
the present as well as the future sources of revenues.

Liquidity analysis is important for the reason that it influences managers to explore
different ways for creating new revenues as well as boosting the existing sources of
funds. Yet, as liquidity analysis is being undertaken, the other critical analysis would
require the evaluation of the resilience of the local government financial system.
Such resiliency must be measured by the extent to which given the available
revenues and sources of funds, the local municipality would be able to withstand all
the eventualities as well as sudden events with potential to disrupt the overall
performance of the local municipality. It is such capabilities to withstand all
eventualities that indicate the level of the maturity of the local government financial
sustainability. In case, the local municipality is found to be incapable, then, it is
important that the local municipality develops and applies critical strategies for
boosting the overall level of financial sustainability. Besides the analysis of
resilience, it is also important for the local municipality to examine the dimensions of
service and fiscal responsibilities.

Service and fiscal responsibilities measures the extent to which the local municipality
would be able to meet all their financial and fiscal obligations without relying on
external measures such as borrowing. Positive scores attained on all these factors
influence the confidence that the public have in the local government financial
system. Since, most of the supplies to the municipalities are drawn from the public,
this public confidence is critical for ensuring the continuity of the local municipality.
Public confidence and trust also eliminate risks of emergence of disruptive events

226 | P a g e
such as strikes and riots that may occur if the public has lost trust and confidence
that their needs will be met. Yet, as these measures are being applied to gauge the
level of maturity of the local municipality financial sustainability, it is also critical to
use the five spectrums (at risk, compliance-based, incremental, strategic &
systematic) of local government financial sustainability.

7.3.6 Five Spectrums (At Risk, Compliance-Based, Incremental,

Strategic, & Systematic) of Local Government’s Financial
Sustainability
The five spectrums of local government financial sustainability which can be used for
measuring the maturity of the local government financial sustainability include risk,
compliance-based, incremental, strategic and systematic. At risk would imply that the
local government financial system is weak and very vulnerable to being disrupted by
any eventualities. It implies that there is insufficient revenue as well as total
incapability to meet the existing as well as future financial obligations. The financial
sustainability of the South African local municipality is presently at this state. This
implies that, investment in revenue generating activities is critical for improving the
maturity of the overall local government financial sustainability. In addition to being at
risks, the level of the maturity of the local government financial sustainability is also
at the compliance-based levels. In the compliance-based levels, initiatives are only
undertaken to comply with relevant policies and legislations without the actual
commitments of the officials to leverage the overall financial sustainability of the local
municipality. This implies that it is of significance for the department of local
government to invest in the initiatives that would improve the maturity of it financial
sustainability from incremental to the systematic and strategic level.

The incremental level is measured by the fact that there are often stronger
recognitions of the importance of financial sustainability. In effect, the executives in
that particular government department may tend to be innovative by conducting
frequent analysis to identify the improvement initiatives that can be undertaken to
bolster the financial sustainability of a government department. In that process, the
concept of financial sustainability is strongly integrated in the objectives and goals of
the organisation. This is also accompanied by the development of strategies in terms
of projects that can be implemented to bolster not only the capabilities of the
government department to spend the required financial resources, but also to gain

227 | P a g e
revenues from the successfully implemented projects. Since, at such a level, the
government is strongly concerned and engaged in the drive to improve its financial
sustainability, it may also invest in the training and development of the existing skills
as well as constant monitoring and evaluations to ensure the government
department becomes financially sustainable. At the strategic level, the notion of
financial sustainability is deeply entrenched through the different levels of
government with the effect that all the politicians and top government officials
frequently include it in their campaign manifestos.

As financial sustainability is strongly emphasised in the strategic plans, integrated

development plans and the campaign manifestos, the government also continuously
campaigns and advocates for resource optimisation and implementation of projects
that bolster increment in the sources of revenues. At the systematic level, the
concerns for improving financial sustainability often get entrenched as part of the
organisational culture. Since, the drive to improve financial sustainability is part of
the organisational culture; there is often stronger drive of the executives to integrate
sustainability as part of the critical goals that the government department strives to
achieve.

The integration of sustainability as part of the critical goals that must be achieved is
often accompanied by the stronger long-term commitment of the executives to
ensure that relevant resources are allocated towards the implementation of the
strategic plans and projects that influence improvement of financial sustainability of a
government department. However, constant changes of governments in a fully
developed democratic society often cause changes that render it difficult for a well-
developed systematic system to sink unless all the new governments also strongly
recognise financial sustainability as a critical prerequisite for effective performance of
a government department.

7.4 CONCLUSION
Local government financial sustainability leverages a local municipality’s capabilities
to conceptualize and implement an array of its developmental programmes. This
thesis evaluated the state of the initiatives for bolstering financial sustainability in the
increasingly complex contemporary South African local government sphere. The
motive of the study was to identify major paradoxes and the local government

228 | P a g e
financial sustainability model which could be extracted and suggested for mitigating
such constraints. Using a meta-synthesis as a principal technique in content
analysis, findings revealed major determinants of local government financial
sustainability are often linked to the application of the four-step’s processes in
strategic cyclical financial sustainability framework and three foundational constructs
for financial sustainability management.

The four-step processes in strategic cyclical financial sustainability framework were

found to aid environmental analysis, identification of the sources of revenues and
revenue generation, managing the utilization of the generated revenues, and
monitoring and evaluation. As it emerged from the findings, these positive effects of
strategic cyclical financial sustainability framework are often illuminated by three
foundational constructs for financial sustainability that leverage financial risk
management, governance and leadership. However, in lieu of the application of
relevant mitigating strategies, it also emerged from the analysis of the findings that
initiatives that bolster financial sustainability may still be constrained by poor analysis
and identification of the level of financial sustainability maturity. Other paradoxes
were found to be linked to lack of suitable government financing models, poor
strategic financial planning and budgeting as well as lack of effective models for
managing equity. However, even in the midst of such paradoxes, findings still
indicated that the concept of financial sustainability is a notion which is increasingly
being emphasized by the South African local government sphere.

To leverage municipal financial sustainability, most of the municipalities were found

to use financial sustainability models and methods such as central financial grant
system, SALGA’s model for financial sustainability, investment in revenue-generating
activities and managing municipal operational efficiency as a driver of cost
minimisation. However, despite such significant strides, findings still revealed that
despite various socio-economic initiatives undertaken to leverage financial
sustainability of the South African local government, the state of financial
sustainability in the South African local municipality seems to be at risk as contrasted
with the other levels such as compliance, systematic and strategic levels. As it
emerged from the findings, this is attributable to the fact that most initiatives for
improving financial sustainability in the South African local government are often still
constrained by inadequate municipal capacity, limited income generating activities,

229 | P a g e
deficient local government procurement system and poor leadership and
governance. Such findings seem consonant with theoretical findings that signified
the major paradoxes of financial sustainability in the contemporary public sector
organisations are often associated with poor analysis and identification of the level of
financial sustainability maturity, lack of suitable government financing models, poor
strategic financial planning and budgeting and lack of effective models for managing
equity.

Drawing from these findings, it is argued it is critical that the department of local
government adopts and applies the local government financial sustainability model
akin to the conceptual model suggested in Figure 1. The application of such a model
would require integration and use of the four main pillars (strategic financial planning,
income diversification, sound financial administration and management, and own
income generation) for local government financial sustainability, three foundational
constructs (financial risk management, financial governance and financial ethical
leadership) for local government financial sustainability, and three foundational non-
financial constructs (political stability, fiscal and economic stability, forecasting and
sensing to mitigate the devastating negative effects of natural calamities and
disaster) for local government financial sustainability.

It was further argued that all these must be accompanied by measurement of the
overall maturity of the financial sustainability of the local municipality using four
perspectives (liquidity, resilience, service and fiscal responsibility & public
confidence) of local government financial sustainability in conjunction with the five
spectrums (at risk, compliance-based, incremental, strategic & systematic) of local
government financial sustainability.

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