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Municipal Spending: The key factors

EWN looks at the broad factors which are key to understanding fruitless & wasteful expenditure at a municipal level.

waste-moneyjpg

What issues do we need to consider when evaluating and reporting on fruitless & wasteful expenditure?

There are several broad contextual factors that need to be considered when compiling any narrative report or making a finding or conclusion about any specific municipality’s incurred fruitless expenditure.

These may include:
- Changes in or new demarcations
- Inherited financial burdens
- Poor municipal management (for example, previous municipal managers being sued for corruption, mismanagement, etc)
- Regional or local conditions, demographics, etc (relative population, budget, poverty profile, etc)
- Financial history / historical performance
- Change in municipal management (not just recent elections, but by-elections)
- Influence of provincial government if any

And so on.

The AG report also identifies significant financial indicators/behaviours that have a material impact on compliance and performance of entities. This links back to “what” the money is being wasted on and gives a very clear indication of why it might be the case:

• Poor financial health and low levels of debt recovery may contribute to interest on arrear creditor accounts:
P92 of the AG report:

Municipalities’ financial health continued to deteriorate, with 15 municipalities (68%) in a net current liability position (their current liabilities exceeded their current assets). Most municipalities faced severe cash flow constraints as their collection of fees for services rendered was poor, resulting in late payments to creditors and an infrastructure maintenance backlog of R1,9 billion. In total, municipalities were owed R9,8 billion by consumers for services, and only R3,1 billion of this amount was expected to be recovered. Payables has increased year on year, from R4,4 billion in the previous year to R6 billion in 2014-15, with Eskom being the largest creditor at R1,7 billion. In addition, interest on arrear creditor accounts resulted in a significant increase in fruitless and wasteful expenditure, from R95 million in 2010-11 to R321 million in 2014-15.

This is not just a broad trend, it is easy to identify in the specifics:

Eg, in the AG MFMA report section under Mpumalanga [p103], we read the following:

It furthermore took an average of 116 days for local municipalities to recover money owed by their consumers. This, in turn, made it difficult for municipalities to pay their creditors, which on average took 327 days. The delayed creditor payment resulted in interest being charged, which is the main contributor to the significant increase of R226 million in fruitless and wasteful expenditure compared to 2010-11.”

This may be something that is both easy and important to explain to audiences that have less sophisticated financial literacy, and clearly illustrates a vicious cycle particularly in poorer regions (again, why context such as local poverty may be important to take into account).

For more detailed information, visit this page listing the 20 worst wasters.

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