1. Introduction

The challenge facing local government in South Africa today is to find ways to improve efficiency and effectiveness in order to enhance and sustain service delivery to a demanding and often impatient community. The liberation of South Africa has brought about many privileges, but also many new challenges. Virtually overnight, municipalities have had to contend with a hugely extended demand for services. At the same time, the survival of commerce and industry is under threat. Our markets are flooded with international produces. Survival will depend on factors such as productivity, flexibility, quality, as well as efficiency and effectiveness, which also determine input costs.

Municipalities determine service charges and rates and therefore influence input costs directly. Excellence at local government level is, therefore, of vital importance for the South African economy. However, it is not only commerce and industry which is affected by municipal service charges; domestic consumers have become impatient with the continuous increases in rates and service charges and are vociferously demanding excellence in service delivery. This can only be achieved if municipalities continuously seek to improve their values, policies, strategic plans and objectives. Councillors and officials must be keen to share learning amongst themselves and learn from others, conduct regular and systematic top-down and bottom-up reviews and assess all areas and facets of their municipalities. This approach should become standard behaviour and conduct.

The key factors in achieving excellence are commitment, responsibility, accountability and capability.

Everyone should understand the aims and capabilities of the organisation and know what has to be done to achieve them in a structured way. Role-players need to know which teams and people are responsible for achieving the results. People should be held accountable for their actions. Such methods move organisations away from the often costly short-term activities such as crisis management, quick-fix solutions or firefighting to achieve customer satisfaction.

The focus of this paper will be to examine the financial successes of municipalities from the viewpoints of external investors and the general public.

Very few attempts have been undertaken to measure the financial performance of municipalities in South Africa. Project Viability is the first comprehensive attempt to highlight the financial difficulties currently experienced. Normally, the financial results achieved by a municipality / organisation are indicative of other difficulties, related to either leadership or management (processes).
The few organisations that concern themselves with performance measurement in South African municipalities are:

Excellence Foundation
The South African Business Excellence Foundation has developed eleven criteria to measure excellence. These criteria are:

• Leadership
  How the behaviour and actions of the council (political leaders), executive team and all other leaders inspire, support and promote a culture of business excellence.
• Policy and strategy
  How the organisation formulates, reviews and translates policy and strategy into plans and actions.
• Customer and market focus
  How the organisation determines customer and market requirements and expectations, enhances relationships with customers and determines their satisfaction level.
• People management
  How the organisation releases the full potential of its staff to turn itself into a high performance organisation.
• Resources and information management
  How the organisation manages and uses resources and information effectively and efficiently.
• Processes
  How the organisation identifies, manages, reviews and improves its processes.
• Impact on society
  What the organisation is achieving in satisfying the needs and expectations of local, national and international communities.
• Customer satisfaction
  What the organisation is achieving in satisfying its external customers.
• People satisfaction
  What the organisation is achieving in satisfying its own people.
• Supplier and partnership performance
  What the organisation is achieving in managing supplier and partnering processes.
• Business results
  What the organisation is achieving in relation to its planned business objectives and in satisfying the needs and expectations of everyone with financial or other stake in the organisation.
  
  

Rating agents apply different techniques to evaluate the risk associated with government debt. In general, most of the agents examine the following aspects:

• Political level
  The political level determines the functions and income sources of municipalities. The structure of income sources and their relation to intergovernmental transfers and national averages can be determined.
• Administrative systems
  Work procedures and organisational arrangements play a major role in conflict resolution. The division of functions between political and permanent functionaries is important. Information regarding the following aspects is analysed:
• The independence of the audit.
• The continuity of service by professional staff.
• Financial plans.
• Work relationships.
• Demography and infrastructure
  Backlogs in service delivery of municipalities play a role in the evaluation. The action plans of municipalities to deal with these backlogs, as well as the ability and willingness of the respective communities to pay, are determining factors.
• Local economy
  The economic indicators, strategies and capital investment patterns of the private and public services are important.
• Income structure
  Current income structure and historic patterns determine the ability of municipalities to obtain external loans.
• Historical growth patterns
  The historical growth patterns of cities compared to the inflation rates give an indication of the cities’ ability to meet future capital commitments.
• Liquidity
  The ability of a municipality to convert current assets into cash to meet current liabilities and the provision of a dedicated own funded working capital reserve plays a crucial role in the evaluation of its financial health.
• Capital spending patterns
  The historical and anticipated capital spending patterns are analysed. Capital expenditure is a justifiable and legal item for loan finance. The consequential capital cost (interest and redemption) places a burden on the cashflow of a municipality. An analysis of the long-term consequences on operating budgets is therefore required.
• Debt management
  All aspects relating to debt management are analysed. These include:

               • Current and future commitments.
            • Provision for repayment
            • Method of calculation of repayments.
            • Structure of income base to support debt.

These are clear indicators. Although rating agents are mainly concerned with analysing financial risk and leadership, quality of management and other nonfinancial indicators play a major role in determining performance. This paper, however, will only focus on the current financial situation of municipalities. It will endeavour to find causes for the situation by referring to the criteria used by SABEF and rating agents.