Original Research

Enhancing municipal performance: Analysis of financial sustainability disclosures in South Africa

Malewa J. Tshabalala, Beatah Sibanda

Received: 11 Feb. 2025; Accepted: 07 Aug. 2025; Published: 23 Sept. 2025

Copyright: © 2025. The Author(s). Licensee: AOSIS.
This is an Open Access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Background: The financial performance of South African (SA) municipalities has been declining, raising concerns about financial sustainability in the public sector. The International Public Sector Accounting Standards Board (IPSASB) has advanced research on sustainability reporting. Aligning financial sustainability disclosures with the Recommended Practice Guideline 1 (RPG 1) issued by the IPSASB could improve municipal financial performance.

Aim: This study assessed whether financial sustainability disclosures in SA municipalities enhance financial performance when aligned with RPG 1.

Setting: The study focused on SA metropolitan municipalities, a key subset of the country’s 257 municipalities that are crucial for service delivery and financial management.

Methods: A qualitative research method, underpinned by the Public Sector Financial Sustainability theory, was used. The researcher employed content analysis to identify key themes in the Integrated Development Plans of metropolitan municipalities.

Results: Findings revealed inconsistencies in disclosure practices among municipalities. Some municipalities partially disclose long-term financial sustainability in line with RPG 1, while others omit such disclosures entirely. As compliance with RPG 1 is not mandatory, many municipalities present themselves as going concerns despite financial strain, which could potentially mislead stakeholders and the public.

Conclusion: The study highlights inadequate financial sustainability disclosures and their impact on financial performance. Addressing these inconsistencies could enhance transparency and municipal financial performance.

Contribution: This study advances knowledge on financial sustainability disclosures in metropolitan municipalities. It informs decision-making on municipalities’ ability to continue as going concerns and emphasises the need for improved financial reporting practices.

Keywords: financial sustainability disclosures; financial sustainability; local government; long-term financial sustainability; municipalities; public sector; sustainability reporting; service delivery.

Introduction

The financial performance of South African (SA) municipalities has been deteriorating over the years. Each year, these municipalities appear to have widespread non-compliance, insufficient financial controls and a consistent inability to address critical areas of concern (Barclay 2024). Despite occasional improvements in the performance results of the municipalities, the overall trend remains bleak, with only a handful of municipalities achieving clean audits. For example, the 2022/23 financial year reported 268 material irregularities amounting to more than R5 billion in estimated losses, highlighting the deep-rooted problems plaguing local governance (Barclay 2024). Interestingly, the municipal challenge is not unique to South Africa, as many countries face similar pressures because of declining economies (Navarro-Galera et al. 2016:3961).

These performance issues have led to a growing concern about financial sustainability in the public sector, prompting the International Public Sector Standards Board (IPSAB) to advance research on public sector sustainability reporting. In South Africa, several municipalities continue to rely on the National Treasury because of their inability to sustain themselves financially. This reliance stems from ineffective financial management, evidenced by the failure to effectively meet financial commitments because of cash flow and liquidity issues. The 2021/22 Auditor General South Africa (AGSA) report highlighted that, despite the limited funds available, municipalities failed to manage their funds diligently. This ineffective management of funds calls for urgent government intervention, as the Municipal Financial Sustainability Index (MFSI) corroborates this concern by indicating a looming financial collapse of SA municipalities (Petterson 2022).

Some of the primary sources of municipal financial distress include poor revenue collection and irregular, fruitless and wasteful expenditure. Chauke (2016) and Ensor (2020) posit that SA municipalities struggle with revenue collection, a key contributor to their financial distress. Additionally, Buthelezi (2022) highlights that prolonged periods of poor revenue collection further exacerbated this financial strain. The fact that irregular, fruitless and wasteful expenditure increased by more than 50% from R4.89 billion to R7.41 billion between the 2021/22 and 2022/23 financial years symbolises ineffective management of funds (AGSA 2023:65).

As stated above, the prevailing circumstances of ineffective financial management suggest a correlation between financial management practices and financial sustainability in SA municipalities. Poor financial management strains financial resources and threatens the municipalities’ long-term sustainability. Moreover, the global economic crisis, evidenced by substantial increases in government debt and deficits, has brought significant attention to the financial sustainability of municipalities (Bisogno, Cuadrado-Ballesteros & García-Sánchez 2017; Navarro-Galera et al. 2016).

Governments worldwide have acknowledged the importance of disclosing financial sustainability in their financial statements. This information is crucial in reflecting the municipalities’ ability to continue providing services to residents and fulfilling its responsibilities (Claassen 2011:20). Long-term financial sustainability improves accountability, strategic decision-making and financial management, allowing users of financial statements to evaluate various factors within the financial statements, including the nature and extent of inherent financial risks within that entity (Accounting Standard Board 2017:9; De Lange 2010:22; International Public Sector Accounting Standards [IPSAS] 2016:2691). Consequently, it is imperative for governments, particularly municipalities, to report on long-term financial sustainability within their financial statements, as it reflects their ability to anticipate and respond to future changes.

According to De Lange (2010:22), financial statements are prepared in accordance with the IPSAS, including Generally Recognised Accounting Practices (GRAP), and report on a specific period’s transactions and events. However, De Lange (2010:22) noted that these financial statements provide limited or no records regarding the future sustainability or affordability of ongoing municipality operations and programmes. The International Public Sector Accounting Standards Board (IPSASB) is fully cognisant of the gap in long-term financial sustainability reporting and accentuates the importance of adding information regarding the sustainability of government initiatives to historical financial statements (De Lange 2010:22; IPSAS 2013:6).

Over the years, the overall SA economy has declined. Previous research has attributed the declining economic status to debt accumulation that exerts pressure on the national budget (Hajilou et al. 2018:78; Navarro-Galera et al. 2016:3961). According to Fourie and Blom (2022:30), South Africa has found solace in using debt to augment public sector expenditure and ease the budget deficit. A recently published Harvard report revealed that the gross debt in South Africa between 2008 and 2022 increased from 23.6% to 71.1% (Harvard 2023:2). This places South Africa among the 20 African countries with the highest debt to gross domestic product (GDP) ratio.

Despite the country’s current economic status, municipalities at all levels continue to exert pressure on an already financially burdened economy, further burdening limited government funds. The burden exerted by municipalities on the national government questions their developmental duties as tabled in the Constitution of the Republic, which states that municipalities must structure and manage their administration, budgeting and planning processes to promote the social and economic development of the community (Constitution of the Republic 1996). It further questions compliance with the Municipal Finance Management Act (MFMA) 52 of 2003, whose objective is to ensure proper and long-term management of the financial and fiscal affairs of municipalities (SA 2004:22). Furthermore, this exacerbates the financial sustainability of SA municipalities, questioning their ability to be able to continue as a going concern. To address this, the IPSASB sets out the guidelines in Recommended Practice Guidelines 1 (RPG 1) for financial sustainability disclosures. Adhering to the RPG 1 guidelines is essential, and the study argues that financial sustainability disclosures in SA municipalities need to be adequately disclosed to aid in predicting and addressing municipalities facing financial distress. Consequently, the study seeks a comparative analysis to determine whether financial sustainability disclosures aligned with RPG 1 enhance municipal performance in South Africa.

Although sustainability reporting is still emerging in the public sector, this study asserts that disclosing financial sustainability information could assist the National Treasury in managing municipalities facing financial distress. Financial sustainability disclosures could be instrumental in projecting the municipalities’ ability to continue as a going concern. According to Hintsa (2022:3), there is an urgent need to address financial sustainability, considering that it has been undermined over the years. The IPSASB provides that the financial statements of an entity should provide information on financial sustainability to determine its ability to continue as a going concern. Such reporting indicates the anticipated long-term sustainability of an entity’s finances over a predetermined period (IPSAS 2013:4). Although this is recommended, a review of the financial information presented by municipalities reveals that this needs to be adequately disclosed.

Internationally, several studies have explored the measurement and management of financial sustainability, for example, Navarro-Galera et al. (2016) and Bisogno et al. (2017). However, this research is not grounded in the SA context and is referenced here for benchmarking purposes. Locally, the literature on financial sustainability disclosures remains limited, particularly in municipalities. De Lange (2010:22) reported little appreciation for sustainability reporting in SA municipalities because of a lack of legislation enforcing sustainability information reporting. Because the RPGs guide good practice and do not establish reporting requirements, the IPSASB issued Exposure Draft 63, a consultation paper developed to outline the proposed standard. The IPSASB issued this draft to solicit comments on whether RPGs should be made compulsory. However, several countries advised and urged the IPSASB to continue improving RPGs before enforcing them.

Consequently, it remains the responsibility of each country to develop and enforce legislation that promotes public sector sustainability. Considering the urgency and importance of financial sustainability challenges, this study compares SA metropolitan municipalities’ financial sustainability reporting disclosure practices to RPG 1 to determine whether they align. The study hopes to advance new knowledge on the usefulness of financial sustainability disclosures in enhancing municipal financial performance and to answer the research question:

‘Do financial sustainability disclosures aligned with the RPG 1 enhance municipal financial performance in South Africa?’

The study’s findings may inform policymakers by providing relevant information that could be used to evaluate the quality and quantity of disclosure information reported by municipalities. The findings could also refine risk management and decision-making processes, thereby addressing future financial sustainability challenges.

Literature review

Introduction to financial sustainability

The concept of financial sustainability in local government has gained significant attention in finance and public administration scholarship because of the global economic crisis, which has increased debt and deficits in government finances (Bisogno et al. 2017; Bolívar et al. 2014; Navarro-Galera et al. 2016:3961). Governments globally acknowledge the importance of disclosing financial sustainability information in their financial statements. Financial sustainability is the ability of local governments to continue to fulfil their duties to citizens while maintaining a suitable short- and long-term financial state of the local budget (Bolívar et al. 2014). According to Bolívar et al. (2014), accounting measurement of financial sustainability is crucial in responding to the growing informational demands of stakeholders. Marx and Van Dyk (2011:107) and Lubbe, Dhansay and Anthony (2015:310) assert that various stakeholders now require both financial and non-financial information that is reliable, detailed and timely from the public sector. According to Ouda (2022:13), this level of reporting increases the usefulness of projections and makes them easier to understand and interpret.

South African municipal financial challenges

In South Africa, several municipalities continue to rely on the National Treasury because of their inability to sustain themselves financially. Nkuna (2021) asserts that over a decade ago, the Local Government Budget and Expenditure review noted an increasing reliance by municipalities on fiscal transfers from the National Treasury. Oosthuizen and Thornhill (2017:2) suggest that the existing budgetary transfer system may delay the autonomy and self-sustainability of municipalities, resulting in prolonged dependence on the National Treasury. Additionally, the AGSA and the MFSI have continuously raised concerns about the deteriorating financial health of most municipalities. There is already a burden on municipalities in providing services because of limited financial resources. Nkuna (2021) verified the barriers to revenue collection affecting municipalities, while Mbulawa (2019) confirmed a positive relationship between improved service delivery and fiscal distress, making financial sustainability a concern in continued service delivery. The challenges of revenue generation, coupled with high debt levels and budget deficits, are a complex national problem resulting from prolonged financial management failures and a deteriorating economy (Buthelezi 2022; Enwereji & Uwizeyimana 2020; Majikijela 2017; Navarro-Galera et al. 2016; Shava 2020:396). Identifying financially strained municipalities may help authorities identify municipalities in distress and take precautionary measures before allocating funds.

The repercussions of this inherited problem cast doubt on municipalities’ financial sustainability and ability to continue as a going concern. During audits of municipalities’ annual financial statements, the AGSA highlights concerns about a municipality’s ‘going concern’ standings (Feng & Neely 2017:176). These standings serve as an indicator of their ability to continue operating in the future. In 2021, the AGSA reported that only 28% of municipalities disclosed significant doubt in their financial statements about their ability to continue operating as a going concern. At the same time, the ability to continue as a going concern was threatened by the credit-rating downgrades of some municipalities, which placed pressure on their ability to raise funding for capital expenditure, resulting in the use of internal savings from the operational budget to fund shortfalls. Consistent with this, the MFSI for the 2021 fiscal year revealed that the SA municipal sector was on the verge of collapsing, calling for government intervention (Claassen & Kocks 2022:1). The strained financial health of municipalities exacerbates the deteriorating economic situation.

The recommended practice guideline 1 and best practices

In its Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities, the IPSASB previously acknowledged that additional information regarding the long-term sustainability of these schemes is needed, as the financial statements are unable to meet all users’ information needs on social benefits (Accounting Standard Board 2017:9). The IPSASB introduced the RPG 1, which guides long-term financial sustainability reporting of public sector finances over a specified period (IPSAS 2013). In addition, RPG 1 outlines the minimum disclosure prerequisites on forecasts and information reported on long-term financial sustainability. According to the IPSASB, the ability of governments to meet their debt servicing obligations has been an area of concern. Hence, information reported by RPG 1 represents a sign of good practice (IPSAS 2013:4).

The SA public sector referenced the IPSAS in developing its accrual accounting standards known as the GRAP (Accountancysa 2022). In developing and implementing their public sector accounting standards, several countries, such as those in Europe, Austria, Russia and Cyprus, have also referenced the IPSASs (Accountancysa 2022). However, the Accounting Standard Board (2017:10) noted that because an entity’s long-term financial sustainability reporting requires officials with skills in complex financial modelling to prepare sophisticated planning and budget processes, most governments, including South Africa, do not formally prepare reports as required by RPG 1. Failure to prepare reports as required by RPG 1 could lead to governments undermining the user’s ability to effectively evaluate their long-term financial sustainability and hindering them from making informed decisions. In the context of South Africa, this lack of reporting may lead to delayed responses from the national and provincial treasuries in providing the necessary support and reforms to municipalities, indicating potential financial distress in the future.

Implementation gaps and the need for disclosure

More than a decade has passed since the IPSASB introduced RPG 1 in 2013, and SA municipalities are still struggling to maintain their financial sustainability. Claassen (2011:22) asserts that financial sustainability in SA municipalities does not receive the necessary attention. Therefore, there is an urgent need to compare SA municipalities’ financial sustainability disclosures reporting practices to RPG 1 to identify areas of concern and improve financial performance. Financial sustainability disclosures should contain information sufficient to determine whether municipalities can continue as a going concern; however, the National Treasury (2022:74) noted that SA municipalities frequently rely on fiscal transfers from the national government to balance their budgets. Calitz and Essop (2013:146) and Makgetla (2007) agree that Provinces and Municipalities have been increasingly depending on intergovernmental grants to balance their budgets. Consequently, municipalities feel as though they should be given more resources or that they do not receive enough in the way of national transfers (Pieters 2015). However, given the dire financial situation of the national treasury, it is doubtful that they could afford to support municipalities financially (Petterson 2022).

Public sector financial sustainability (PSFS) reporting is proving to be a vital and significant component for the survival of future generations (Bolívar et al. 2014). As a result, international organisations and researchers have expressed the necessity of assessing and managing financial sustainability in national and local governments in response to stakeholders’ demands (Navarro-Galera et al. 2016). Gardini and Grossi (2018) argued that the weak financial sustainability in the local government could be addressed by the local government’s ability to maintain financial sustainability over the long term.

The Second Quarter Local Government Report for 2023, released by the National Treasury, revealed that most municipalities were not budgeting to ensure prudent financial management (National Treasury 2023). The national and provincial treasury assigns each municipality the responsibility to formulate a budget that aligns with its existing funds. Without a budget, municipalities risk overspending, which can negatively affect their credit ratings and financial sustainability. Financial sustainability in the public sector refers to the ability to meet current obligations and maintain service, debt and commitment levels at reasonable levels relative to national expectations and expected future income while maintaining public confidence (IPSAS 2013:5). Hajilou et al. (2018:84) adds that financial sustainability reflects a financial position that allows the public sector to provide services in the current financial year and the future years without risking their revenue and expenditure norms. Consequently, the assessment of financial sustainability requires proper disclosure of financial information.

International insights

The significance of financial statements for evaluating financial sustainability was emphasised by the International Federation of Accountants (IFAC), which views them as essential to comprehending the current state of public finances (IFAC 2014). While financial statements report past events, financial sustainability disclosures focus on the future. According to O’Neill (2023:1), for a municipality to remain in existence in the future within an environment of economic uncertainty and political instability, it should be able to remain financially sustainable. López Subires and Rodríguez Bolívar (2017:4) confirm that financial sustainability should be required to achieve financial health in public entities. Furthermore, a model for financial sustainability is required (Hintsa 2022:3). However, it falls outside the scope of this study to assess whether the level of financial sustainability is adequately disclosed in the financial information presented by these municipalities, as this could aid the identification of ailing municipalities to implement mitigating strategies.

Government responsibility and capacity building

Section 34 (1 and 2) of the MFMA states that the national and provincial governments must, by agreement, assist municipalities in building the capacity for efficient, effective and transparent financial management and must support their efforts to identify and resolve their financial problems. The United Nations defines capacity building as developing and strengthening the skills, instincts, abilities, processes and resources organisations need to survive, adapt and thrive in a fast-changing world. The collins dictionary (2024) defines capacity building as developing the potential for people to improve and respond to the needs of their community. Although numerous definitions of capacity building exist, the concept falls outside the scope of this study, which is mentioned to illustrate the responsibility of national and provincial governments towards local government.

Both definitions suggest that capacity is built when people or organisations are empowered to function independently. Contrary to this, in the current regime of municipal failures, the study contends that capacity building seems to have lost meaning as the trend has shifted from capacity building to reliance. The root cause of this problem can be attributed to the failure to collect revenue and meet financial commitments when they become due (Buthelezi 2022; Chauke 2016; Ensor 2020; Enwereji & Uwizeyimana 2020; Majikijela 2017; Shava 2020:396). Previous studies on municipalities and the findings of the AGSA point to the deteriorating state of most SA municipalities and how they continue to rely heavily on fiscal transfers from the national government to balance their budgets (Calitz & Essop 2013:146; Makgetla 2007:146–170; Nkuna 2021; Oosthuizen & Thornhill 2017:433–450; Pieters 2015). The continued financial deterioration undermines the financial sustainability of most municipalities.

The importance of financial sustainability disclosures

Marx and Van Dyk (2011:106) highlight that the concept of sustainability and sustainable development proves to be difficult. However, there is a need to strengthen the financial sustainability of SA municipalities. In municipalities, deteriorating financial sustainability has an impact on service delivery, which in turn impacts the standard of living for residents and the economic activity of different businesses. For this reason, stakeholders must remain informed about a municipality’s financial sustainability through financial sustainability disclosures. This will ensure that key stakeholders have the information needed to make informed decisions about the municipalities’ ability to create value in the short, medium and long term.

South African municipalities are familiar with poor administration and mismanagement of funds. Several studies have investigated the financial position of municipalities and the factors influencing them (Hintsa 2022; Kleynhans & Coetzee 2019; Mbulawa 2019) although a few studies focus on financial sustainability disclosures, particularly in the public sector. Despite these studies, the financial sustainability of municipalities continues to deteriorate, threatening the quality of life for most SAs and businesses.

Long-term financial sustainability

The financial crisis at the global level suffered by many governments has ignited interest in the concept of financial sustainability (Bisogno et al. 2017). Sustainability can be widely defined. However, this article limits the definition of financial sustainability in the context of municipalities. Long-term financial sustainability refers to the ability of a municipality to meet service delivery and financial commitments both now and in the future (Hajilou et al. 2018:84). Recommended Practice Guideline 1 recommends that an entity reporting on long-term fiscal sustainability should discuss three interrelated dimensions of fiscal sustainability: service, revenue and debt.

Governmental financial reports play a crucial role in assessing financial sustainability. They should provide all the information required to evaluate the capability of public administrations to maintain the level of public services over time (Bolívar et al. 2014). Progressing sustainable development goals requires urgent public sector action. Yet, an internationally recognised public sector reporting framework still needs to be developed to help governments measure and report how they address the global sustainability challenges (IFAC 2014). Globally, countries are actively working on practical improvements that address the consequences of the recent financial and economic crisis. According to Lubbe et al. (2015:309), the SA public sector plans to intensify legislation and regulation to achieve financial transformation while aligning its accounting and reporting standards with the IPSAS. This transformation is pertinent to addressing critical questions regarding the effectiveness of public funds management and providing services within the public sector (Lubbe et al. 2015:309).

Although the SA public sector has highlighted plans mentioned above, the AGSA (SA-Government 2024) finds that financial sustainability remains challenging for most municipalities. In 2023, the South African Local Government Association (SALGA) developed a Municipal Financial Sustainability Programme to assist municipalities in becoming financially sustainable (SALGA 2023). Additionally, Ratings Afrika’s recently published MFSI revealed that of the 104 municipalities and eight metropolitan municipalities tested, only two were identified as the most financially sustainable (Thorne 2024). South African Local Government Association, cited by Mbulawa (2019:8), edifies that the inability of the SA local government to manage expenditures and long-term obligations threatens its financial sustainability. Consequently, the issue of financial sustainability in SA municipalities is not new and has gained much-needed attention.

This attention to financial sustainability is also global, with the IPSAS providing holistic guidelines in RPG 1. The Acts and legislation of the SA public sector would determine specific requirements for these guidelines. The MFMA guides the municipalities in South Africa. Circular 71 of the MFMA provides five indicators for evaluating a municipality in financial distress: total debt to revenue (excluding grants), debt service coverage, debt to net cash ratio, cash flow interest coverage and liability management. The IPSASB argues that the General-Purpose Financial Statements, represented here by Circular 71 of the MFMA, do not meet users’ needs. The IPSASB advocates for a conceptual framework that reports additional information outside the scope of financial statements, known as General Purpose Financial Reporting. Hintsa (2022:3) and López Subires and Rodríguez Bolívar (2017:5) highlight that existing models of financial sustainability are not compatible and practical for SA local government.

Theoretical framework

The financial sustainability of organisations is challenged by a lack of theoretical frameworks that can sufficiently explain the concept (Günther, GleiBner & Walkshäusl 2020). The absence of a relevant theoretical lens proves to be challenging for evaluating the results of the empirical phenomena. To address this challenge, exploring a potentially related theory and concept pertinent to the study of municipal financial sustainability is prudent. The most prominent and closely relevant theory is the PSFS theory. Public Sector Financial Sustainability entails a holistic approach to the government’s ability to manage revenue and debt effectively while maintaining service delivery and remaining financially sustainable over the long term (Ouda 2022). This theory appears to be the most appropriate concept for explaining the phenomena under study, as it aligns with the reasoning of the RPG 1 framework and addresses the current research problem.

Research methods and design

The study adopted a qualitative research methodology using content analysis to assess financial sustainability disclosures in SA municipalities. As Tracy (2019:3) explains, qualitative research entails becoming fully immersed in a situation and attempting to make sense of it, which aligns with the aim of this study to deeply explore disclosure practices. In line with this, Aspers and Corte (2019:139–160) emphasise that qualitative research is an iterative process, where new significant distinctions emerge through close engagement with the phenomenon being studied, thereby enhancing scientific understanding. This approach was suitable for analysing the content of financial reports and the Integrated Development Plans (IDPs) issued by municipalities to assess the extent and quality of financial sustainability disclosures. A judgemental or purposive sampling criterion was used to select the cases for document analysis. According to Etikan, Musa and Alkassim (2016:2), purposive sampling involves a deliberate selection based on the characteristics relevant to the study. In the context of this study, SA metropolitan municipalities were specifically chosen as the unit of analysis because of their economic significance, the volume and nature of their financial transactions and their heightened expectations of compliance and disclosure. These municipalities are also key role players in the country’s economy and are mandated to provide reliable financial reports, making them ideal for this study.

A content analysis was conducted on the most recent publicly available annual reports and IDPs of all metropolitan municipalities in South Africa. This method was appropriate, as the aim of the study was to assess the financial sustainability disclosure practices of these municipalities empirically and to compare disclosures to the guidelines outlined by RPG 1, issued by the IPSASB in 2013. Because the recent reports available in the public domain at the time of the study were for the 2022/23 financial year, these were used as the primary data sources.

Content analysis was selected because it enables the systematic and reliable analysis of qualitative data, allowing for the categorisation and comparison of disclosed information. While previous research has demonstrated the usefulness of content analysis in disclosure studies (e.g. Aggarwal & Singh 2019; Dumay & Cai 2015; Marx & Van Dyk 2011), this study applied the method in a new context by focusing specifically on financial sustainability disclosures by SA metropolitan municipalities:

• Financial sustainability disclosure categories: An Excel spreadsheet was created to capture categories, guided by the RPG 1.
• Document analysis: The annual reports and IDPs of each metropolitan municipality were reviewed to identify disclosures related to financial sustainability.
• Benchmarking: Each disclosure was compared against the specific recommendations of RPG 1, including the RPG’s disclosure dimensions.
• Coding: A coding framework was developed using the RPG 1 guidelines. These codes were applied to the content of the IDPs and annual reports to classify the disclosures systematically.
• Themes: The codes were grouped into themes aligned with the RPG 1 to facilitate meaningful comparisons across these municipalities.
• Evaluation: The financial sustainability disclosures were assessed for alignment with the RPG 1 recommendations.

The analysis aimed to determine and document the extent and nature of disclosure requirements and to identify patterns, inconsistencies and areas for improvement in line with the RPG 1. The findings of the study are presented in the following section.

Ethical considerations

Ethical clearance to conduct this study was obtained from North-West University, Economics and Management Sciences Research Ethics Committee (NWU-01813-24-A4). The study did not require contact with human participants, animals or the environment, which resulted in minimal ethical considerations.

Findings and interpretation of results

Although IPSASB recommends adherence to RPG 1, the study’s findings revealed that South Africa is not legally obliged to adhere to these requirements. Voluntarily reporting disclosures is less effective than when it is legally enforceable by law. Disclosures in their current state, which present municipalities as going concerns, may be misleading to stakeholders because they do not accurately reflect the municipalities’ financial state. However, some may be reporting on their financial sustainability. In addition, municipalities reveal their financial sustainability on a medium-term basis rather than on a long-term basis, as recommended. Municipalities that are unable to maintain their financial independence must rely on the national and provincial governments to meet their responsibilities. Service delivery is impacted by compromised financial sustainability, which in turn affects business economic activity and the standard of living for citizens.

Although percentages have been used in the study to illustrate the findings, this study adopted a qualitative approach. The use of percentages reflects the proportional patterns observed during the content analysis and does not imply a quantitative methodology. The study’s results, aligned with the abovementioned categories, are now explained in the following paragraphs.

Disclosure of financial sustainability information

The study’s first phase was determining if the selected metros disclosed any financial sustainability information. This information was set out in five categories, as shown in Table 1. Out of the five categories, only two were reported in the municipal managers’ report on financial sustainability and information on long-term planning and projects in IDPs.

From Table 1, the researcher identified five potential categories for financial sustainability disclosures. However, only two of the five categories contained relevant information relating to financial sustainability reporting. The specific aim of identifying these categories was to establish financial sustainability reporting practices in these metropolitan municipalities. The evidence in Table 1 reflects a holistic picture of financial sustainability disclosure practices in metropolitan municipalities.

In Category Three, only two of the eight metropolitan municipalities included the municipal manager’s report on financial sustainability in their annual reports. In category five, seven metropolitan municipalities provided information on financial sustainability disclosures within their IDPs. None of these municipalities included financial sustainability disclosures in their annual or performance reports. The absence of these reports suggests that these metro municipalities employ the IDPs as a principal document for financial sustainability disclosures.

The findings of Table 1 support those of Claassen (2011:22) and De Lange (2010:22), indicating that the municipalities’ annual reports contain minimal to no information on financial sustainability. Additionally, financial sustainability does not receive consistent attention across all municipalities. Categories one and two clearly show the inconsistency, as these municipalities are providing information related to financial sustainability. The findings reveal non-conformity or standardised practice in financial sustainability disclosures by these metro municipalities, with category five being the only exception.

The SA public sector plans to advance financial transformation through increased legislation and the adoption of IPSAS-aligned accounting standards (Lubbe et al. 2015:309). However, reporting on financial sustainability remains neither a legal requirement nor enforceable by the GRAP. The findings in Table 1 indicate a common practice among these municipalities, implying a lack of legislative mandates under the PFMA and MFMA or procedural standards on the disclosure of financial sustainability information. In category five, municipalities provided financial sustainability information, long-term planning and projections within their respective IDPs. The absence of a standardised practice guideline and regulatory framework has resulted in either omitting relevant information from the annual reports or obscuring information in the IDPs.

Disclosure of the dimensions of financial sustainability

The study’s second phase was to determine whether the metropolitan municipalities included the reporting dimensions on financial sustainability as recommended by the IPSASB. Recommended Practice Guideline 1, based on IPSAS, suggests that an entity reporting on long-term financial sustainability should discuss three interrelated dimensions: service, revenue and debt. As evidenced by Table 1, data collected from the respective IDPs of the municipalities and evaluated according to the dimensions of RPG 1 are illustrated in Table 2.

Table 2 presents the findings of metropolitan municipalities’ compliance with RPG 1, with specific attention and focus on the three dimensions of financial sustainability disclosures in the IDPs. Recommended Practice Guideline 1 states that these dimensions are interconnected because modifications to one influence the others. Future services, for instance, are financed by revenue and/or debt.

Dimension 1: Service

According to RPG 1, the service dimension considers the volume and quality of services provided to recipients over the projection period, given the existing policy assumptions on revenue while staying within the debt limitations. Based on the results in Table 2, only 25% of the municipalities complied with the service dimension disclosure. Metro A and Metro D provided information on service delivery plans for the current and future years. The 25% compliance represents a significant deficiency in the metropolitan municipalities reporting on service delivery sustainability. The absence of this presents a serious threat to sustainable service delivery, which ultimately affects the performance of municipalities. One of the performance measures of a municipality is consistent service delivery, and reporting on the service delivery dimension is imperative.

Dimension 2: Revenue

Recommended Practice Guideline 1 states that the revenue dimension considers projected revenue levels based on existing policy assumptions for service provision to recipients while adhering to debt limitations. Based on the results in Table 2, 75% of the metropolitan municipalities (Metros A, C, D, E, G and H) disclosed revenue collection information, reflecting a consistent approach to revenue dimension disclosures. However, Metros B and F did not disclose any information related to the revenue dimension, which may indicate a lack of legislative and regulatory requirements enforcing such disclosures. Additionally, these metropolitan municipalities may not prioritise such disclosure without mandated practice guidelines.

Dimension 3: Debt

According to RPG 1, the debt dimension assesses projected debt levels based on the existing policy assumptions for service provision to recipients, including self-generated revenue and other revenue sources. One of the key focuses of this dimension is the municipality’s capacity to meet commitments as and when they become due, refinance or increase debt when necessary. According to the results in Table 2, only 25% of the metropolitan municipalities (Metros A and G) disclosed information related to debt management, highlighting a limited focus on debt-related disclosures. The effective management of debt, including planning and projection, is pivotal for ensuring the financial sustainability of metropolitan municipalities.

Overall results

Overall, metropolitan municipalities have a strong focus on revenue, with significantly less attention on service and debt dimensions. Additionally, only Metro A disclosed information in all three dimensions, while Metro B and Metro F did not disclose any information in any of the dimensions. Although the IPSASB provides holistic guidelines, the specific requirements would be determined by the Acts and legislation of the respective countries. The MFMA guides the municipalities in South Africa. Circular 71 of the MFMA provides five indicators for evaluating a municipality in financial distress: total debt to revenue (excluding grants), debt service coverage, debt to net cash ratio, cash flow interest coverage and liability management. The dimensions in the MFMA do not differ significantly from RPG 1. The non-compliance with RPG 1 is closely linked to the non-compliance with MFMA, as only 2 out of 8 metros reported on the debt dimension, implying that the indicators set out in the MFMA are not adhered to.

Disclosure practices in metropolitan municipalities

The third phase of the study involved analysing the existing financial sustainability disclosure practices of metropolitan municipalities, as outlined in the IDPs, to identify the items typically disclosed and significant themes. The results are presented in Table 3.

From Table 3, the researcher identified 12 disclosure items (codes) across the IDPs of eight metropolitan municipalities. The MFMA outlines three of these items as legislative requirements, namely the surplus budgets and reserves, the generation of sufficient revenue and the effective and efficient management of liabilities and debts. There is a variation in items disclosed among these IDPs. However, the variation was expected given the lack of legislative requirements for specific disclosures other than the three requirements of the MFMA. Notably, these MFMA requirements are not disclosure requirements but legislative objectives that all municipalities should strive for. Table 3 shows that these metropolitan municipalities are not fully adhering to these MFMA requirements, reflecting non-compliance.

Additionally, Table 3 reveals that the nature of the disclosures varies because of the absence of clear and precise legislative guidance, resulting in non-uniform disclosure practices. This inconsistency of disclosures suggests a lack of understanding of which items should be disclosed. The items that are mainly disclosed by metropolitan municipalities are compliance with the MFMA and Municipal Systems Act, followed by long-term financial planning and viability. While seven municipalities disclosed the item, one did not provide information on long-term financial planning and viability.

Table 3 presents six themes identified in the disclosure practices of eight metropolitan municipalities. Of these eight municipalities, only one disclosed information on the Investment Attraction and Economic Development theme. According to De Lange (2010:24), stakeholders are undoubtedly interested in information included in long-term sustainability reporting. It is therefore concerning that only one metropolitan municipality disclosed matters on Investment Attraction and Economic Development, bearing in mind the shortage of investment opportunities and economic activity in SA local government. Disclosing Investment Attraction and Economic Development information is relevant to the provincial and national treasuries. This disclosure demonstrates the municipality’s efforts to increase revenue streams and contribute to sustainable community development.

Table 3 also reflected themes such as Revenue Enhancements, Expenditure Optimisation and Borrowing and Debt Management. These themes are closely aligned to the revenue and debt dimensions in Table 2. Notably, 75% of metropolitan municipalities disclosed information on the revenue dimension. However, the findings of Table 3 reveal some inconsistencies in items identified under the Revenue Enhancement and Expenditure Optimisation theme. These inconsistencies might be because municipalities report revenue information on a medium-term budget basis and provide a brief narrative discussion. On the contrary, disclosures under Borrowing and Debt Management appear consistent with the debt dimension in Table 2, with only three municipalities disclosing information relating to this theme.

Overall, the researcher identified six themes in the disclosure practices of metropolitan municipalities. Under each theme, specific items represented the disclosure practices of these municipalities. The findings of Table 3 revealed that there is no universal way of disclosing information relating to financial sustainability. This further emphasises the absence of legislative requirements or established practice guidelines, which these municipalities may follow in making such disclosures.

Compliance with recommended practice guideline 1 disclosures checklist

The fourth and final phase of the study involved comparing the disclosure requirements of RPG 1 with the disclosure practices of the metropolitan municipalities in the IDPs. The findings of this comparison are presented in Table 4.

The following symbols will be used to indicate the disclosure:

• YES: Disclosure fully aligns with RPG 1 requirements
• NO: No disclosure is included in the IDPs
• TSE: To some extent, disclosure aligns partially with RPG 1 requirements

According to RPG 1, the following practices should be disclosed in the financial sustainability reports of municipalities.

Table 4 categorises the disclosure requirements of RPG 1 into four groups. The categories are then given a brief description of information that should be included per RPG 1 requirements.

Category 1: Basic information

As evidenced in Table 4, only Metros A and D fully complied with the disclosure requirements of RPG 1, while five metros, namely Metros C, E, F, G and H, partially provided some key components in their reports. Metro B, however, was the only municipality that did not disclose any information relating to the basic disclosure requirements of RPG 1. Although most metropolitan municipalities reported some information as required by RPG 1, the researcher observed that this information was not consistently disclosed or lacked structure. It was challenging to locate specific information, as each municipality presented these disclosures differently.

Category 2: Narrative discussion of the projections

Compliance with the requirements of RPG 1 in this category is minimal. The findings of Table 4 reveal that only Metro A and H demonstrated partial compliance. All metropolitan municipalities included projections in their respective IDPs. However, the narrative discussions were not provided. Such narrative discussion is paramount, considering that these amounts are susceptible to change because of factors such as inflation, economic activity, etc., which can influence future outcomes. The inclusion of these disclosures reflects the municipality’s ability to anticipate changes and adjust projections accordingly on an annual basis.

Category 3: Narrative discussion of the dimensions of long-term fiscal sustainability

In Table 2, the findings revealed that 75% of municipalities included a narrative discussion on the revenue dimension, while only 25% reported on the service and debt dimensions. It was further noted that Metro A was the only municipality that reported on all three dimensions, as recommended by RPG 1. However, Table 3 revealed that although 75% of these metropolitan municipalities reported on the revenue dimension, there were inconsistencies, as some of these municipalities appeared to be reporting on this dimension on a mid-term budget basis with only a brief narrative discussion. These findings are consistent with Table 4, where 75% of municipalities reported on the dimensions of long-term financial sustainability. Five of these municipalities also reported partial disclosures of long-term financial sustainability dimensions. However, only Metro A fully complied with RPG 1 recommendations, while Metro B and Metro F did not disclose any information related to these dimensions.

Category 4: Principles, assumptions and methodology that underpin the projections

Fifty per cent of the metropolitan municipalities provided partial narrative discussions in category 4. In Category 2, it was observed that while these municipalities included projections in their respective IDPs, the recommendations of RPG 1 require detailed explanations of these projections, and narrative disclosure comprises some form of substance. The partial discussions identified in the findings of Table 4 suggest a lack or absence of guidance on how to report on these projections effectively. Additionally, there is a significant variation in the information reported by each municipality. It was also noted that the remaining 50% of the municipalities did not disclose any narrative information to support their projections.

Discussion

Practical implications

South Africa is not immune to financial sustainability concerns confronting municipalities, because most of its municipalities encounter substantial financial difficulties. Researchers are prompted to look for creative solutions to improve financial sustainability immediately. A review of financial sustainability disclosures can lead to improved transparency, potentially enhancing the administration of municipalities. The study aims to advance knowledge on financial sustainability adequacy by disclosing information in metropolitan municipalities. The sufficiency of financial sustainability could aid decision-making in assessing the municipalities’ ability to continue as a going concern. This information could also help flag municipalities that need immediate intervention in the overall administration of the municipality. The study’s findings could inform policymakers by providing relevant information that could be used to evaluate the quality and quantity of disclosure information reported by municipalities. Evaluating these disclosures could aid the development of strategies to improve financial sustainability within SA municipalities.

Limitations

To assess the financial sustainability disclosures in the annual reports and IDPs of the selected municipalities, the study employed content analysis. Although some researchers contend that the data in annual reports cannot be relied upon and might not accurately represent the company’s objective reality, an empirical investigation may improve the results. Therefore, the result of this study could be enhanced by an empirical investigation that gathers data from the municipalities’ primary stakeholders. Furthermore, assessing sustainability disclosures alone is not enough to determine the sustainability of the municipalities. To ensure municipalities remain viable and sustainable for future generations, further research could focus on methods to enhance their financial sustainability.

Conclusion

South African municipalities face significant financial distress, highlighted by AGSA reports, news reports on failure to meet financial commitments and the infamous service delivery protests. These issues threaten the long-term financial sustainability of municipalities, highlighting the importance of these disclosures to help alleviate these challenges. This study aimed to compare the metropolitan municipalities’ disclosure practices to RPG 1 by the IPSASB to determine whether financial sustainability disclosure could enhance financial performance.

Phase 1 of the study found that metropolitan municipalities disclosed information relating to long-term financial sustainability within their respective IDPs. The findings further revealed that only two municipalities included the municipal manager’s report on financial sustainability in their annual reports. These findings revealed a consistent practice among municipalities, where they reported minimal information in the annual report but provided any long-term financial sustainability information in the IDPs. This practice aligns with RPG 1 requirements, which require that disclosures be included in the annual reports or as part of another report, bringing forward a level of confidence in discovering that there are some disclosures in the IDPs relating to long-term financial sustainability. However, this highlighted the absence of legislation or guidance on how and where these disclosures should be presented.

The second phase discussed the dimensions of long-term financial sustainability as outlined in RPG 1. The findings revealed a common practice of prioritising revenue over debt and service dimensions. Notably, the findings indicated that these dimensions are interrelated, with changes in one dimension impacting the other two. It was also revealed that these dimensions are closely related to municipalities’ financial distress indicators in Circular No. 7 of the MFMA. The focus on revenue dimensions may stem from efforts by these municipalities to avoid or mitigate impending financial distress.

However, in the third phase of the study, inconsistencies were discovered in the metropolitan municipalities’ practices relating to the revenue dimension, as discussed in the second phase. For example, municipalities reported on mid-term and provided brief narrative discussions on the dimensions contributing to these inconsistencies. The findings in the third phase revealed significant variations in the disclosure practices of these municipalities. This variation will complicate the stakeholders’ ability to compare these disclosures across municipalities and assess the impact of disclosure on long-term financial sustainability. Moreover, this disparity will advantage some municipalities while leaving others without the necessary guidance.

The findings from phase four of the study show that some municipalities partially comply with RPG 1 disclosure requirements. This suggests that complying fully with RPG 1 and including long-term financial sustainability information in the annual reports of municipalities is possible. Only one of the eight metropolitan municipalities disclosed information across all four categories, although partially in some categories, closely aligning with RPG 1, which states that an entity may claim full compliance if it is fully aligned with RPG 1 standards. Based on this, the study supports the notion that 100% compliance is possible.

Acknowledgements

The authors declare that they have no financial or personal relationships that may have inappropriately influenced them in writing this article.

B.S. contributed towards the conception and design and supervision of the study. M.J.T. acquired, analysed and interpreted the data (the majority of the research). All authors contributed towards drafting the works.

The authors received no financial support for the research, authorship, and/or publication of this article.

Data for the study were publicly available and accessed from the national treasury website. https://municipaldata.treasury.gov.za/.

The views and opinions expressed in this article are those of the authors and are the product of professional research. They do not necessarily reflect the official policy or position of any affiliated institution, funder, agency, or that of the publisher. The authors are responsible for this article’s results, findings, and content.

References