Hearings on Gauteng Municipalities (City of Johannesburg, Emfuleni, City of Tshwane)

Meeting report

The Chairperson said the meeting was a follow up to the Committee’s oversight visit to Gauteng where they had not engaged with the City of Johannesburg, City of Tshwane and Emfuleni Municipality.

Auditor-General’s Office
Ms Mabatho Sedikela, Business Manager in the Gauteng office of the Auditor General, said the City of Johannesburg had received a qualified audit outcome. There were property category differences, and only estimates – not actual meter readings – were used for billing purposes. There were false supplier declarations in tenders, unapproved changes to targets, the information in reports was unreliable, as there was improper record keeping, there was overspending on guarding services and material amendments to the financial statements. There was non-compliance with Regulation 36, resulting in irregular expenditure.

Emfuleni Municipality had received a qualified audit outcome with findings. In Emfuleni, the focus areas requiring concentrated effort were leadership, financial performance and governance. Service providers had failed to declare that they were employed by the State and over 90% of the information provided in the financial statements was not verifiable and could not be tested. There were material errors in the financial statements even though they had outsourced the job to consultants. This also meant no skills transfer was taking place. Of the staff establishment posts, 50% were vacant, which inevitably meant that the financial statements would not be up to scratch. There were poor Information Technology (IT) user access controls.

The City of Tshwane had received an unqualified audit. There was non-compliance with Regulation 36, resulting in irregular expenditure.  Seventy percent of targets for predetermined objectives were not measurable. There were weak IT user access controls and IT continuity was weak.  Leadership needed to pay attention to performance evaluation, codes of conduct, vacancies, and IT disaster recovery. Finance and performance management needed to attend to monitoring of unauthorized irregular expenditure and the weak control of IT user access.

Discussion
Mr A Matila (ANC, Gauteng) wanted the Auditor General to be more specific, as the issues raised were too general to be dealt with.

Mr A Lees (DP, KZN) asked how much had been spent on penalties to SARS.  What were the material amendments to the financial statements?  Who was responsible for the Municipal Infrastructure Grant (MIG) under-expenditure?

Mr C De Beer (ANC, Northern Cape) asked for how long the Auditor General had been checking the findings of municipalities.

Ms Sedikela replied that on the 23rd July 2012, it had tabled a detailed analysis in the general report.  She said the City of Johannesburg penalties were for VAT not paid on time. The material amendments were concerning revenue and leave. She said AGSA had been training municipalities in order to capacitate the internal auditors.

City of Johannesburg
Mr Quentin Green, CFO of the City of Johannesburg, said the city had minimum cash balances of around R2bn since 2007, but had from time to time raised R1.1bn in loans for cash flow purposes.  By the end of 2012, all loans would have been redeemed and they were unlikely to require any more as the city had healthy liquidity, with the assets to liabilities ratio standing at 1.25:1. The credit ratings agency Fitch and Moody had given them AA- and A1 ratings in the long term and F1+ and P -1 respectively, in the short term. Services provided had accounted for 50% of revenue. Debt collection had averaged 91.5% over the past three years. There was under spending in the capital budgets of community development, Johannesburg Water, development planning, transportation and city parks services. In the short term, it wanted to stabilise its finances, refine the implementation of the Integrated Development Plan (IDP) and accelerate service delivery for basic services. The 2012/13 budget would be split into operational expenditure of R33.4bn and capital expenditure of R4.2bn.

The City planned to address the major issues of leave and the billings for rates, power and water, as it acknowledged there were weaknesses. It said the IT issue would take longer to sort out.  The firm KPMG would be assisting in addressing issues, and in training.

Regarding the Public Transport Infrastructure and Systems grant (PTIS), Mr Parks Tau, executive mayor of the City of Johannesburg, said that the Auditor General’s figure of 41% was far lower than they had thought it was.

Emfuleni
Ms Nelisiwe Greta Hlongwane, the Mayoress, said that the major challenge for the municipality was cash flow problems.

Mr Sam Shabalala, Municipal Manager, said the value of assets stood at R9bn, while its budget had been exponentially increasing to four times the budget of ten years ago due to increased service delivery demands. Although the budget was growing, the majority of the developments were for RDP housing. The budget for 2011/12 was R3.7bn and for 2012/13 was R4.5bn. Electricity coverage was 97% and waste water discharge had improved to 97%. Unemployment in the municipality stood at 45% and was a major challenge. There were backlogs in capital spending on roads and water of R9bn and R10bn respectively. Payment levels in poor areas stood at 3% while water losses, due to difficulties in defining non-revenue water, stood at R180m per annum. Electricity losses, due to syndicates reconnecting electricity after it had been cut off, stood at R20m per annum. There were challenges around the functionality of the billing of services.  Eskom’s price increases had had a significant impact on the municipality as it had resulted in exponential increases in payments to Eskom, and had resulted in the municipality having to raise an overdraft of R150m to cushion against cash flow problems. It was currently billing customers less than what it was paying Eskom for electricity. The appointment of a debt collecting agency was in an advanced stage.

Mr Pontsho Matlala, acting CFO, said the deficit of 2010/11 was a result of the unbundling of fixed assets, depreciation, and interest payments on debt impairments.  76.29% of capital expenditure for 2011/12 had been spent and council-funded projects had been underspent by R37.7m because funding had been impacted by the low revenue income.  National grant expenditure stood at 96%, but an R18m restructuring grant had been withheld by Treasury.

Mr Shabalala said the municipality did not have a robust enough tariff model and therefore some services had been delivered at below cost. The water tariff was higher than it should be, but this was offset by the property tariff being lower than what it should be. He said if Emfuleni had to pass on the Rand Water tariff of 14% only, then the municipality would be under-recovering, as its costs would then not be included. Overtime was only paid to essential service personnel in the fire, water and electricity departments. There were vacancies in critical areas because of the precarious cash flow problems. He added that he was not sure that the staff establishment of the municipality was correct. He said all compliance committees were functional, with the Municipal Public Accounts Committee (MPAC) being the only one experiencing difficulties.

City of Tshwane
The Chairperson said that the Tshwane Ratepayers Association had sent a memo to the Committee which had raised issues it had with the municipality. He said a meeting needed to be convened to address these issues.

 Mr Kgosiento Ramokgopa, the mayor, said the municipality had undergone two mutations with respect to the expansion of the municipality’s boundaries. The municipalities that had been incorporated had brought with it large service delivery backlogs and no revenue base, which had resulted in the municipality’s revenue being thinly dispersed. He said in future there should be financial dispensation through a restructuring grant when municipalities were incorporated, so that the metro could discharge its responsibilities.

He said the municipality had to be active in the debt capital market to develop alternative revenue streams to raise an R1.5bn municipal bond, but their efforts had been frustrated by the opposition parties in the council. After having been defeated in the council, the opposition parties had cloned themselves as a ratepayers’ association to try to continue frustrating the municipality.

Mr Andile Dyakala, CFO, said the 2011/12 budget incorporated the municipalities of Metsweding, Nokeng-tsa-Taemane and Kungwini , and there was no differential in the tariff structure or in the budget policy. It had received only R20m from the Gauteng Provincial Department. It had requested assistance from the Treasury but had received none. Since July 2012, it had implemented a cash back strategy of keeping back R21m per month to develop reserves as a cash flow management strategy.  In addition it focused on efficiency gains and a fleet management strategy. All special projects had been done away with, marketing had been consolidated and it was scaling down on non-essential expenses. All IT purchases would be centralised and integrated. There was a robust MPAC in place and it was moving away from a balanced budget to a funded budget. Treasury had issued a statement to confirm that this move did not breach any Treasury regulations. Its gearing had decreased from 39% to 36%. It had allocated 28 officials to institute Operation Clean Audit and it had a revenue enhancement unit. It had blocked all vendors working for the municipality, but did not have access to the databases of other departments and municipalities. It was in the process of cleaning the vendor database. Deviations had been reduced from R500m to R250m. It had filled all senior management posts up to level three, excluding two posts where the job offers had been declined. Two senior managers were facing disciplinary processes. The internal audit team was highly under-capacitated.

Discussion
Mr M Makhubela (COPE, Limpopo) asked Tshwane municipality what the disciplinary action against the two senior management officials were. Could the municipality elaborate on the categories of debt item of R600m in 2010/11, and what steps were being taken to recover the money? He asked Emfuleni municipality to elaborate on the category of debt item of impaired debtors amounting to R347.9m, and asked who was responsible for it. He asked the City of Johannesburg municipality whether the R6.1m losses reported was as a result of criminal activity and whether criminal charges had been laid at the police and if so, what the status of the case was. He asked how reliable the municipality was, if the actual meter readings were disregarded in favour of estimates.

Mr De Beer asked the City of Johannesburg to clarify the fluctuations in the spending of their conditional grants and asked Emfuleni municipality to comment on the under-spending of their MIG grants. He asked Emfuleni and Tshwane municipalities how they were servicing their overdrafts. He asked Tshwane municipality to comment on the under-spending of the roads infrastructure grants.

Mr Lees asked the Tshwane mayor what the extent of the short and long-term borrowings were. What was the real increase in revenue or was the municipality in fact seeing a decrease in revenue?  What was the return on cash investments, compared to the cost of borrowings?  Who owed the municipality R100m of long-term debt? Had the Special Investigation Unit (SIU) reported on criminal cases and mismanagement, had criminal charges been laid and what was the extent of the losses?  How were they and the City of Johannesburg dealing with illegal connections?  Was credit control being applied uniformly in the two municipalities? He said the City of Johannesburg’s billing was a vexing issue. Why were 2 000 queries rejected when presented to them?  Could they confirm to the Committee that the billings issue was no more a problem – and why was it a problem in the first place?  Who was responsible and what action has been taken against the persons responsible?

Mr D Bloem (COPE, Free State) asked how many contracts had been awarded to people in the service of the state.  Who was investigating the awards made to people in other state institutions whose interests had not been declared?

Mr S Montsisi (ANC, Gauteng) asked if the service charge increment of 25.9% was the same for all households, irrespective of property size.  Why were conditional grants unspent?

The Chairperson said the figures found in the Emfuleni presentation and later on, when it summarised its top ten challenges, were not the same. Could it give the correct figures? Could it elaborate on the R18m which had to be returned to Treasury?  Revenue collection affected all residents but he had not heard what they were doing to collect debt.  How were municipalities dealing with illegal connections?

Mr Ramokgopa replied that the municipality was active in the debt capital market and that there was an orchestrated opposition to undermine the ability of the municipality to have a clean audit. He knew where the ratepayers’ group was coming from. The costs of merging the new municipalities had been quantified to between R700m and R1.2bn.  Three IT systems had had to be combined and there had been migration and a cleaning of data. The municipality had written to the Treasury three times, with no response. Its revenue collection was across the board, and credit control was robust and aggressive. The majority of collections were in the informal settlements. It had rolled out temporary electricity provision as an interim measure and had passed a by-law making prepaid electricity compulsory.  It had made R3bn funding available to get everyone on prepaid. The affordability of electricity, he said, was a political question.

Mr Jason Ngobeni, Municipal Manager of the City of Tshwane, said two management officials had been investigated for Supply Chain Management irregularities. The outcome should be finalised in two months. In the SIU case, it was still being investigated and he expected that to be completed by the end of the year. The performance agreements of senior management had a clause which resulted in no bonuses being paid out to them if a clean audit was not achieved.

Mr Dyakala said the R638m payment was a once-off write-off of interest for all residential accounts as an incentive mechanism. He said only R500m of the loan had been utilised and it would have been paid back by the end of the financial year. It received R2bn per month in revenue and used the loan only as a short term bridging facility. Long-term borrowings had increased from R5bn to R6bn. The 25% increase in service charge was regulated by Rand Water and NERSA.  The revenue increase was based on actual customers paying.  All meter estimates were for a period of six months. Long-term debtors amounted to between R102m and R108m, and were debtors who had made arrangements to pay over a period greater than 12 months.

Mayor Tau said Rea Vaya had been implemented via the PTIS grant faster than money had been made available so bridging finance had been required. In 2011/12, a decision had been taken to reroute the line through Louis Botha Avenue, thus the figure of 41% in the Auditor General’s report must have been because of a misunderstanding.   An important issue was that ratepayers and the municipality could not engage via an intermediary as there was no contractual relationship with the intermediary.  Issues of property valuations with respect to property rates were subordinate to regulations, and were therefore beyond municipal control and were a matter for the national government.

Mr Trevor Fowler, Municipal Manager of the City of Johannesburg, said the municipality would engage with the Auditor General’s office on the matter of the PTIS grant expenditure. The municipality felt the figure was 71%. Regarding meter readings, he said the city had established dates and milestones which needed to be reported back to the public so that they were aware of the progress being made.  In credit control, the municipality had focused on the large users of electricity, which accounted for 70% of revenue funds, and efforts had also been made so that all areas were addressed equitably. Illegal connections were reported to the police. Seventeen people had been blocked from tenders because they were city officials. Twelve of the 17 had not declared their interests and in two cases they were minority shareholders in the company. The Urban Settlements Development Grant rollover had been approved by the Treasury. The performance agreement stated that disciplinary action would be taken for any transgressions. The R6m loss related to criminal activity, and the Internal Affairs Directorate was currently investigating it.

Mr Green said that in 2009, the city had claimed VAT on Rea Vaya, which SARS had accepted, but in 2011 this opinion had changed and SARS had claimed the VAT.  After negotiation it had been split 50/50 between dedicated and non-dedicated assets. The interest payments were on the amount that the city had claimed it was exempt from paying. Regarding the meter readings, he said there had been a transfer of information between two systems. The new system had a number of checks and balances and one of the checks was that if actual readings fell outside of the average for the past six months, then the actual readings were rejected and estimates were generated. A process was underway to correct the averages, because if it was left unchecked the problem would increase with each subsequent month.

Mayoress Hlongwane said police, nurses and teachers were not paying for services.

Mr Matlala said current debt was R2.6bn, of which more than half was for water and sewerage. It had entered into an overdraft to deal with the seasonal winter period increase in usage. More than 80% of residents in residential townships were not paying; hence it had established Operation Patala (to pay for municipal services). It had written off indigent accounts as well as sundry accounts above 180 days.

Ms Sedikela said that revenue challenges had been a problem since 1996 and something needed to be done to get it resolved. She said financial management reforms were necessary, as the big cities were growing quickly and engagement was needed to develop different models for the big cities.

The meeting was adjourned.