The finances relating to infrastructure and service delivery often form a significant portion of the overall municipal budget, and financial management practices and systems for the entire municipality are reflected in the micro- management of service finances. Yet there are a number of specific practices relating to services that are worth highlighting, and a number of typical practices have particular effects on service management.
Poor financial management capacity will inhibit the proper functioning of any service delivery system, but PPPs, particularly those involving the large-scale private sector, impose a much greater need to understand commercial practices. Some of the more general management deficiencies are made clear by considering the day-to-day management of service finances. It is not uncommon to see, for instance, the following:
• A lack of clarity as to what a service costs to provide and a lack of information in the right form. This may be accompanied by a lack of interest in investigating and carrying out cost-benefit analysis and benchmarking to spell out cost and tariff implications.
• A lack of separation (or ringfencing) of finances for individual services. Even those municipalities that run separate accounts for water or for solid waste do not always include all the recurrent costs under that sub-head (e.g., staff costs and vehicle maintenance are often included in general overheads).
• A lack of structured decision-making over the allocation of subsidies, and a lack of transparency in relation to the cross-subsidisation of welfare services by revenue-earning services.
• A lack of good financial expertise within a line department. Service departments do not have book-keepers, accounting technicians or accountants; senior service managers that have little financial awareness. Service managers are more used to payroll accounts than to monitoring contract payments.
• A lack of knowledge of the business of the service in the central finance department; revenue staff, especially counter staff, are rarely customer oriented; a lack of responsibility for promoting new parallel business opportunities.
The impact of service financing (and thus the changes needed) will vary between sectors and with the differing scope and content of the partnership arrangement. The impacts of municipal finances on solid waste management, for instance, are very direct, as a large number of solid waste operators working under service or management contracts are paid directly by the municipality. They take on the risk of providing a service for a given period of time on the assumption that the municipality has the finances to pay them. While this is also the case with water supply and sanitation service and management contracts, the more ambitious forms of contracts in this service sector depend on the customer for payment. They also, however, depend on sound financial policy within the municipality in relation to tariff setting and subsidies.
In addition to the improvements in the general financial management and health of the municipality, effective financial management of service partnerships specifically includes:
• Cost recovery The introduction and implementation of cost recovery principles are central to the creation of sustainable service delivery. To ensure that they will be compensated for the service they provide, private operators will want to see that cost recovery has been addressed before they enter into partnerships.
• Clarity and information Many of the municipal objectives of partnerships will not be fulfilled unless there is more information on which to base decisions. Service costs must be ringfenced in financial reporting and must include all known costs.
• Transparency To improve accountability, cost reporting must be made transparent. All stakeholders become nervous when financial reporting is not open.