102

superseded to a large extent by the overall concept of programme budgeting which makes use of effectiveness cri­teria in the programmes and not only in the restricted area of personnel. It is convenient therefore to discuss only the differences between the traditional line-item system and the present-day concept o'" programme budgeting. The main differences in format are illustrated in the table below and are taken from U.S.A. experience because the first important experiments in the municipal sphere took place there.

TABLE IIMUNICIPAL EXPENDITURE CATEGORIES 1̂/

Line-itern Format Programme FormatGeneral Government Protection of Persons andPolice PropertyFire Protection Administration of JusticeOther Protection Protection of Health andHealth WelfareSanitation EducationHighways Control of EnvironmentCharities Leisure Time OpportunitiesSchools Community ServicesLibraries Supportive ServicesRecreationMiscellaneousThere are several points for discussion arising out

of Table II. Firstly, the line-item format is not strict­ly a line-item format in terms of the classification prin­ciples already described. (2) The appropriation struc­tures associated with central government have traditionally

1. Compiled from Mabel L. Walker, op. cit. p. 150: Robert A. Luther. 'P.P.B.S. in Fairfax County : A Practical Experience', Municipal Finance. August 1968. pp. 40-41.

2. See Chapter IV, Section 5.

103

been the clearest example of classification-by-object- class; municipal classifications in the major categories lean more towards a functional basis for the several rea­sons g'ven in Chapter 4. Reference to Table II shows that expenditure categories set out in the first column do in fact follow a functional pattern. It is only within these major headings that the subjeccive line-item system of classification takes over. A subjective clas­sification used bv several municipalities in U.S.A., for instance, include?) Personal Expenses (Salaries) Non-Per­sonal Services (Rentals, Repairs, Office Expenses) Capi­tal Outlay (Equipment, Structures). ^

Another important difference revealed in Table II is the quality of objectives, which in the case of the programme budget are restricted to the major goals of the community. As an example, the programme budgeting for­mat has as one of its objectives 'Protection of Persons and Property', the goal being more fully defined in the Fairfax County budget as 'To minimize injury to persons and loss of property from unexpected events and violent acts'. This heading emphasises a major goal of so­ciety, and criteria would have to be established to test the extent to which the goal was being achieved. 'Police' and 'Fire Protection', which are listed under the line- item format in Table II would be only second level objec­tives in programme budgeting. There would also be other

1. International City Managers' Association, Munici­pal Finance Administration, p. 157.

2. Robert A. Luther, op. cit. p. 40.

104

second level categories which would contribute to the goal of 'protecting persons and property'. This emphasises an important feature of programme budgeting, unliXe traditio­nal budgeting, that it operates downward from major objec­tives through programmes and functions to the lower-level activities, for example, from 'protecting persons and pro­perty' down to 'testing fire equipment'.

Other details of programme budgeting as well as spe­cial features of municipal budgeting in South Africa will be dealt with later. Sufficient information has been given in this action to illustrate the essential diffe­rences between traditional expenditure categories and pro­gramme budget categories. U.S.A. experience has been stressed more than experience in other countries because both in concept and practice U.S.A. has delivered the most useful documentation. Relevant aspects of systems in other countries will be introduced as supporting data when developments in South Africa are covered.5 Institutional and Procedural DifferencesA comparison will now be made between traditional financial and programme budgeting insofar as the actual process of bud­get-making is concerned. The two procedures showing the various stages of budget making under each of the two sys­tems in a small local authority, are set out in the twosucceeding paragraphs.

Under a traditional budgeting process, an official inthe Parka Department prepares estimates using a format pre pared by the treasury, which shows expenditures for pre­vious y^ar' in respect of salaries, uniforms, telephones.

105

repairs, and so on for each section of the Department.The official studies the figures for previous years and fills in the estimates for the ensuing year. tie may in­crease the estimates because of inflation, increased work load or for other reasons. He submits these to his Head of Department who may revise figures because cl desired policy changes. The completed estimates are returned to the Treasury where the figures for all departments are aggregated and submitted through the Town Clerk or the Chief Executive Officer, with a report, to the committee charged with the duty of framing estimates. The Treasu­rer will comment on increased expenditures and indicate the increased income necessary to meet these. The Com­mittee will proceed to bring the two sides of the budget into be lance by reducing expenditure, increasing income or both. When their deliberations are concluded, the Committee vrill make recommendations to the Council. The Council will accept or reject the estimates and levy the rate for the ensuing year. After approval of the budget, the remaining steps in the budgetary process take theircourse - control, review and report.

Under a programme budgeting process, the preliminary steps would be similar to those set out above except that the format prepared by the Treasury would show expenditure in terms of activities and functions rather than in terms of total expenditure on salaries, stationery and so on.THe Director of Parks would tend to say to his official who drafted the preliminary estimates not 'why have you in­creased the salaries vote by ten per cent' but 'why have

106

you increased expenditure on txeeplanting by ten per cent# and on recreation grounds by only three per cent'. At the Committee stage discussion would also centre around the estimated expenditure on activities, functions and ob­jectives rather than on total amounts in '.arms of things to be bought. In addition to cost estimates in terms of programmes, there would be statements of oucput, showing what is expected to be achieved for the rands and cents shown against programme costs, and ali the figures would be projected for five years ahead. The other stages of budget aporoval, monitoring and report would remain the same, except that the accounting system would be adaptedto a programme basis.

One distinction between the two systems worthy of note is the tendency in financial budgeting for the bud­getary process to be commenced at lower levels with deci­sions being aggregated upwards, whereas in programme bud­geting the process begins with the formulation of major objectives and works downwards to lower level functions, programmes and activities. One serious criticism against the financial system has been that the early decisions made by financial officers and other become entrenched as the upward process continues and deci«ion-making at the top is curbed. Wildavsky has stated that one reason for propagating the system of programme budgeting in the U.S.A. was to give more power in budgetary choices to the Secre­taries. Under line-item systems the Budget Directors exercise a major influence in the exercise of priorities. (1)

___ ______ ___mmrn■— \

1. Aaron Wildavsky, op. cit. p. 140.

107

6 Concluding Statement on Dissimilarities An understanding of the many differences between the two systems of budgeting, set forth in this chapter, is a very desirable background to a study of implementation methods for South African local authorities. Most local autho­rities in South Africa still operate on the traditional financial system and a change-over to an integrated pro­gramme budgeting system is a major undertaking in which conceptual considerations are more important than the form of the budget.

It is beyond the scope of the present study to de­scribe the diverse systems of programme budgeting revealed in the many budget documents which hi.ve been acquired by the writer from overseas scuices. Many of these are un­suitable for South African application, and many so-called programme budgets are little more than functional adapta­tions of line-item classifications. Reference to special features, however, are made in the t »xt: where relevant.

The procedure which will be followed in the remainder of this study will be to consider budgetary methods in South Africa specifically, for the main principles have ncv been established. This will require a discussion on the background to local budget-making as well as a reference to the institutional framework. Implementation procedures based both on overseas experience where applicable and the application of principles will then be proposed and this will be followed by a general review.

100

CHAPTER VII : BUDGETARY THEORY AND PRACTICE IN _______ SOUTH AFRICAN LOCAL AUTHORITIES__________

Sou^.h Africa is a country of vast rural areas with a re-lat vely few densely populated urban areas. The 1970Ceiisus revealed that 47.0 per cent of the total and06.7 per cent of the white population lived in urban areas,and of the total urban population over 60 per cent livedin the seven metropolitan complexes of Witwatersrand,Pretoria, Capetown, Durban, Port Elizabeth, East Londonand the Vaal Triangle. In 1966 there were in allsix hundred and fifty seven local authorities comprisingthree hundred and fourteen municipalities, eighty nineVillage Management Board, ninety eight Health Committees,thirty five Village Councils, ninety two Divisional Covn-

(2)cils a.~td twenty nine sundry other authorities.Tne growth of these multifariout local governing bo­

dies began about the middle of the nineteenth century.Prior to that there had always been 3trong central cortrol, a characteristic of government which had its origin in the first European settlement in the Cape of Good Hope in 1652. As European settlement moved eastward from Cape Town, the ianddrost an3 heemraden appointed by the Central Government exercised most power in the conduct of local affairs. Cen­tral control *as intensified under British colonial rule in

1. S.A.R.. Statistical Year Book 1972, pp. A-ll,A-16.

2. J.W. Cowden, ’Holmes Local Government Finance in South Africa', p. 11.

109

the early nineteenth century. Serious difficulties were encountered as local communities were established further and further from Cape Town. The central government was ultimately forced to accept a considerable measure of re­sponsible municipal government.

The Cape Municipal Ordinance 1836 was passed and it subsequently became a landmark in the history of local self-government in South Africa. It3 provisions, based largely on British local government practice, found their way gradually into legislation in Natal, Orange Free State and Transvaal.

Long before the Union of the four colonies in 1910, each colonial government had promulgated effective laws for the conduct of local affairs. The South Africa Act of 1909 established a legislative and administrative Union of the four colonies, which became provinces. Each had an elected Provincial Council endowed with the power to make ordinances in relation to 'municipal institutions, divisional councils and other local institutions of a si­milar nature'. (2) The South Africa Act 1909 was re­pealed by the South Africa Constitution Act 1961, which preserved the original powers grant'ad to the Provincial Councils. The four Provincial Councils consolidatedand amended the old colonial laws relating to local go­vernment. Ordinances relating to various aspects of

1. L.P. Green, History of Local Government in South Africa , p. 16.

2. Section 85, South Africa Act 1909.3. Section 84(1)(f), Act 32 of 1961.

110

local affairs were passed. The Central Government also passed r arate laws directly controlling certain aspects of local governme.it.

The importance of this historical background lies inthe fact that budgeting and accounting concepts in SouthAfrican local government have x»en greatly influenced byhigher legislative and administrative constraints. Thunumber of laws controlling local government has increasedvery substantially since 1910.1 Legislative Control over Local BudgetingThe evolution of the doctrine of public accountabilitywhich was recounted in Chapter 3 gave ri3e to one clearprinciple insofar as central control over local governmentwas concerned, namely, that local authorities were obligedto make proper arrangements for the control of local funds.The Cape Municipal Ordinance 1836 contained a provisionthat the treasurer could be committed to the common gaol

(2)if he failed to keep the books properly.All the Provincial Councils in South Africa (through

their Administrators) require local authorities to prepare estimates of revenue and expenditure. They further re­quire local authorities to keep proper books of account. Provincial Ordinances control the activities of local au­thorities in such spheres as the raising and redeeming of

1. For example, Public >ealth Act 1919, Housing Act 1920, Electricity A^t 1922, Natives (Urban Areas) Act1923.

2. J W. Cowden, 'Uniformity in Provincial Legisla­tion in regard to Financial Matters', I.M.T.A. - S.A. Con- fexence Proceedings 1957, p. 223.

Ill

loans, the investment of funds, the sale of land, certain aspects of revenue and capital fund3, autnority for incur­ring certain types of expenditure-, the valuation of pro­perty, levying of rates, the audit of account* and other sundry financial matters. The nature of these controls has been extensively surveyed by the writer elsewhere.The legislative constraints which are relevant to the pre­sent study are the preparation of estimates, the keeping of books of account and the audit of accounts.

The control by the Provinces over local budgets inSouth Africa is not as stringent as is the case in severalother countries where local fidgets must be submitted tohigher authorities for approval. Two studies made by the

(2)International Union of Local Authorities confirm this.The Provinces in South Africa do not go further tnan com­pelling local authorities to prepare estimates of revenue and expenditure, primarily for the purpose of levying the annual rate on fixed property. Provision is also made for ensuring that estimates of expenditure are not ex­ceeded without proper authority. There are nevertheless significant latent restrictions in budget-making which arise from the doctrine of uJtra vires. Local authori­ties may do only thj*** things for which positive legisla­tive powers exist, or which are incidental to the *?' rcise

1. J.W. Cowden, External Financial Control by the ppntral Government and Provincial Administrations, over .Lo­ral Government in South Africa, University of Witwatersrand19^87

2 I U L A 1 Local Government Finance and its impojr~ tance for Lo^ai Autonomy 1955? Local.Government Finance 1969.

112

of 3uch powers. Tno doctrine has been criticised on va­rious grounds. It has considerable relevanco in the sphere of budget-making because all expenditure incurred by a local authority must have specific legal sanction. Most of the items in a municipal budget have either been previously sanctioned, or are subject to a later sanction prior to the expenditure in the budget beinj actually in­curred. Budget-making invariably takes place in an at­mosphere of previously approved policies, accepted ideolo­gies and common usage. Routine patterns of expenditure come to be accepted, in which the doctrine of ultra vires plays a vital part and limits the area of choice. Direct external financial control by the Frovinces is thus a ma­jor factor to be taken into account m movements for bud­getary reform.

In addition to positive legislative constraints, there are indirect restrictions flowing from certain laws. The three Provinces of Transvaal, Cape Province and the Orange Free State, for instance, impose an upper limit on the revenue a loca. authority may r^ise froir. the levying of rates. Local authorities in all Provinces must also obtain P r * » - *1 sanction for most tariffs, promulgated in order to cover the cost of services such as water and electrici u , It )■ i «'®ldi'rt happened, however, that an Administrator ha3 r to sanction tariff increases

1. E .B . Scott, 'Waste in Local (kivernment Adminis­tration', I.M.T.A. Conference Proceedings 1937; William A. Robson, The Development of Local Government 1948; Professor F .̂ . Burchell, 'Some Observations on the legal position of Municipalities, Councillors and Town Clerks', Institute of Town Clerks Conference Proceedings 1955.

where these are necessary to establish fiscal balance and for this reason formal legislative constraints have often been regarded as unnecessary. History has shown that Administrators have usually been compelled to take action in the opposite direction, to compel local authorities to increase their income in order to rectify an unsatisfac­tory financial position. In all Provinces the Adminis­trators are given definite powers to intervene when this does happen.

Budgetary control originated in the public sector.The original aim of preparing a public budget was to enable the governing body to set a limit to taxation. Industry and commerce later introduced the concept of bud­getary control as part of management accounting, but their aim was to achieve efficacy in spending. In this they have achieved better result3 than has been the case in the sphere of public administration. There are se­veral reasons for this, such as the concentration of pro­duction in clear entities, the easier measurement of re­sults , and an absence of the great diversity of activi­ties that exists in the public sector. Legislative con­straints in South Africa generally have played an impor­tant part in retarding innovation in budgetary reform. Furthermore, classification principles have also been influenced by these constraints and this subject is dis­cussed in the next section.

1. J.W. Cowden. Holmes Local Government Fin»i>cc-.jjft South Africa, op. cit. pp. 486-^.

114

2 Legislative Control over the form of Accounts There is a close link between control over the budgetary process and control ovfjr the form of accounts. In the sphere of local government the form of '-1'e estimates determines the form of the final accounts, and vice versa. When a Chairman of a Management Committee or Finance Com­mittee delivers his budget speech he referd to the de­tailed estimates of revenue and expenditure which accom­pany his report. In South Africa the expenditure esti­mates are classified mainly under departments, each of which is assigned a ‘vote1, broken down into subjective items like salaries, wages, repairs, loan charges and so on. When the estimates have been formally sanctioned by the City or Town Council the detailed coded 'votes' become the warp c«nd wcof of the accounting system. The classification principles already discussed in Chapter IV refer thus to both budgeting and accounting in local go­vernment; the individual 'votes' in the estimates of revenue and expenditure become the 'votes' in the books of account against which expenditure is debited and xeve- nue credited. Any legislative constraints on the form of accounts would therefore have an influence on budge­

tary patterns.There are in the four Provinces various sections of

the Local Government Ordinances dealing w th subjects like the composition of revenues, the separation of capi­tal and revenue accounts, the need t o preserve the pro­ceeds of land sales in a trust fund, the keeping of pro­books of account and the closing of these within a

115

stipulated period after the end of the financial year. These provisions in themselves do not have as much sig­nificance as the sections of the ordinances that give to the Provincial Auditor strong powers cf control. In most Western countrios a generally iccepted form of con­trol by higher legislative bodies over local bodies is the obligatory audit of accounts by an external auditor. It is not pertinent here to discuss the general powers of Provincial Auditors with regard to the audit of local government accounts, but there is one power that is very important. This relates to the power of Provincial Auditors in Transvaal, Orange Free State and the Cape Province to prescribe the form of accounts, a power which is conveyed by the promulgation of audit regula­tions. ^

The origin of this power to prescribe the form ofaccounts lies mainly in the difficulties experienced byProvincial Auditors in auditing the accounts of some ofthe sma’ler local authorities where accounting standardshave been low, and where books of account had sometimes

(2 )to be written up before they could be audited. Alogical consequence of such a state of affairs would be for auditors to prescribe statements of a specific kind. Provincial Auditors carry out only a financial audit, and several distinguished public auditors have in the

1. ibid. pp. 468-9.2. See for instance A.D. Malan, 'Local Government

Audit in the Orange Free State', I.M.T.A. - S.A. Confe­rence Proceedings 1936, p. 128.

116

past stressed this. (1) One result of such limitation of control to financial surveillance is compulsion or persausion in the direction of a form of accounts which facilitates vouching, but whicli does not -lecessarily meet the requirement? of good management. Public ac­counts have indeed been greatly influenced by audit requirements, which stress the legality rather than the wisdom of expenditure. Expenditure duly authorised comes to enjoy a higher status than expenditure wisely incurred. Furthermore, the duties imposed on auditors with regard to reporting require a specific form of accounts, and routine statistical data demanded by the Provinces influence the compilation of accounts in a manner which facilitates the extraction of information.

The difficulties of Provincial Auditors in conduc­ting the audits of local accounts has also .led to another development, namely, the plea for greater standardisation of accounts among local authorities, -lot only on a Pro­vincial-wide basis but on a national basis. This is a subject which affects the final published accounts of local authorities rather than their books of account.3 Standardisation of the published Accounts of

Local Authorities______________________________The published accounts of local authorities are used forthe following main purposes

(a) to give an account of stewardship(b) tc aid in the formulation and execution of policy

1. W. Powell Morgan, op. cit. p. 130: Sir Edward Compton, op. cit. p. 223• Sir Frank Tribe, op. cit. p. 89.

117

(c) to enable the economy of operation to be assessed(d) to provide financial information for a wider

range of uses, including the compilation and in­terpretation of national finar.^'.al statistics

(e) to present a basis for comparison with other lo­cal authorities. ^

This wider use of published accounts has influenced the form of accounts and stimulated movements towards reform and uniformity. Some of the 'abstracts’ of accounts of local authorities are voluminous, running into hundreds of pages, and have been the subject of much criticism.

In South Africa the need for some uniformity in pu­blished accounts was realised as far back as 1918, when a conference of the representatives of the Statistical Council, the Bureau of Census and Statistics and the four Provincial Administrations was held and a standarised form of questionnaire for local government statistics was agreed upon. The subject of standardisation was later pursued ardently by Provincial Auditors and the Institute of Municipal Treasurers and Accountants S.A. (Inc.).

In 1934 the Statistical Council decided that because of the increasing number and importance of local authori­ties and the magnitude of their operations, a revision

1. Norman Doodson, Accounting in the Public Sector, International Congress of Accountants 19(>2, p. I. "

2. See page 50.3. W. Powell Morgan, op. cit. p. 133; H.B. George,

’A Survey of Local Governmen t 1, Transvaal Municipal Aaso- claticn p. 31 • Presidential Address, I.M.T.A,-S.A. Conference Proceedings 1934 p. 26, 1935 pT'I 1936 p. 1 *>. 1937 p. 26.

118

of the 1918 form was required, and the Provincial Adminis­trations were requested to consider the introduction of uniform accounts for local authorities, a uniform method for presenting statistics in auditors' ~eports and a uniform financial year. This decision was conveyedto the Institute of Municipal Treasurers and Accountants S.A. (Inc.) which undertook to investigate and report upon the standardisation of the accounts of local autho­rities in South Africa. A comprehensive report waa pu­blished in 1938 covering in detail a proposed standard

(2 )form for local government accounts. This report wasadopted by the Inter-Provincial Consulative Committee and subsequently by each of the four Provincial Administra­tions which recommended the adoption of the standardised form by all local authorities.

Growth and diversification of the functions under­taken by local authorities created a demand for new stan­dardised forms, and in 1949 the Institute undertook a new investigation and in 1951 published a further comprehen­sive report. Few of the basic principles set out in the 1938 Report were chanjea, but the diverse nature of local government bodies in South Africa led the Institute

1. The financial years are still not uniform in the four provinces: Natal - 31st July, Orange Free State- 31st March, Transvaal - 30th June, Cape Province - 31st. December.

2. I.M.T.A. - S.A., Report on Standardisation Q_f Abstracts of Accounts of Local Authorities in South Africa 1938

3. I.M.T.A. - S.A., Report on the Standardisation of Abstracts of Accounts of Local Authorities in Sputh Africa 1951.

119

to prepare standardised accounts for three types of local authority - large, medium and small. Local authorities in collaboration with Provincial audit staffs began adop­ting the new form and the Bureau of Census and Statistics adapted its statistical questionnaires to comply wxth the standardised forms.

Although the 1951 standardised forms have been large­ly accepted by local authorities and Provincial Administr- tions, important changes were nade in the pattern of pu­blished accounts as a result of a new set of model munici­pal accounts compiled by the Transvaal Provincial Audit Department- in 1960. Howevor the major changes were in relation mainly to financial statements; the basic clas­sifications of local expenditure in the subjective form recommended by the Institute remained unaffected. At­tention to these baaic classifications will be given in the next section.4 The Separation of Current Expenditure and

Capital Expenditure________________________Although the 1938 and 1951 Report.. on Standardisation con­tain much detail, the only sections which are directly relevant to the present study are those covering the clas­sification of current expenditure. The t«rm 'revenue expenditure’ is used in most municipal accounting text books but it is confusing to those unfamiliar with local government accounting principles. One of these princi­ples rc*q ires the complete separation of 'revenue accounts' and 'capital accounts'. This principle in local govern­ment accounts and some public utility accounts had its origin in the accounts of railway, gas and similar under-

Author Cowden J W Name of thesis Programme Budgeting for South African local Authorities 1973

PUBLISHER: University of the Witwatersrand, Johannesburg

©2013

LEGAL NOTICES:

Copyright Notice: All materials on the Un i ve r s i t y o f the Wi twa te r s rand , Johannesbu rg L ib ra ry website are protected by South African copyright law and may not be distributed, transmitted, displayed, or otherwise published in any format, without the prior written permission of the copyright owner.

Disclaimer and Terms of Use: Provided that you maintain all copyright and other notices contained therein, you may download material (one machine readable copy and one print copy per page) for your personal and/or educational non-commercial use only.

The University of the Witwatersrand, Johannesburg, is not responsible for any errors or omissions and excludes any and all liability for any errors in or omissions from the information on the Library website.