Intervention termination in Okhahlamba, extension in Indaka and intervention in Mtubatuba in KZN

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Meeting Summary

The KwaZulu Natal MEC of Cooperative Governance and Traditional Affairs (COGTA) presented on progress made with regard to the interventions implemented by the Department at Okhahlamba and Indaka municipalities, and the state of affairs at Mtubatuba Municipality which lead to a resolution of the Executive Council to intervene.

COGTA KZN was recommending that the
Okhahlamba intervention be terminated in December as extensive progress had been made in the municipality. The debt book of over R18 million in 2010/11 was drastically reduced; the collection rate had increased; strict expenditure management measures had been put in place and the municipality was able to accurately report on a monthly basis on revenue, expenditure, cash flow, debt recovery and creditors. A clean audit was expected for the municipality.

In contrast, progress at Indaka municipality had been slow, and hampered by uncooperative leadership. Various instances of irregular, unauthorized, fruitless and wasteful expenditure had been reported. The Mayor and council were still unable to exercise effective political oversight and strong leadership to promote financial prudence and good governance. Key leadership positions remained vacant.

The KZN
Provincial Executive Council had decided to intervene in Mtubatuba as a result of financial crisis. The municipality was heavily indebted, was tied into a number of unsustainable contracts, and was facing litigation after having broken one of these contracts. As things stood the municipality would be without the cash flow to repay its debts. The Financial Administrator appointed in terms of the discretionary intervention had drafted and commenced implementing a financial recovery plan which sought to address the causes of the financial crisis. There appeared to be an extremely low probability of the intervention support team achieving its objectives as the council was failing to fulfil its executive obligations – necessary for the effective functioning of the municipality

Members’ questions focused on the problems in Indaka. They asked for details of the politicisation, how regularly the intervention was occurring, the time frame for goals and progress to be made, and if follow-up actions were occurring to ensure individual accountability. The Committee endorsed the recommendations and considered scheduling a visit to Indaka for the following year.

Meeting report

Ms Nomsa Dube, MEC Cooperative Governance and Traditional Affairs (COGTA) for the province of KwaZulu Natal, presented on progress made with regard to the interventions implemented by the Department based on a resolution of the Provincial Executive Council of the Province of KwaZulu-Natal, dated 24 November 2009, to intervene in terms of section 139(1)(b) at Okhahlamba and Indaka municipalities and the state of affairs at Mtubatuba Municipality which lead to a resolution of the Executive Council to intervene in terms of section 139(1).

On 24 November 2009 the Provincial Executive Council of KwaZulu-Natal resolved to intervene at Indaka and Okhahlamba in terms of section 139(1)(b) of the Constitution as a result of failures to fulfil various executive functions. The MEC for COGTA was authorised by the Executive Council to appoint administrators at these municipalities. The administrators were appointed to undertake the functions in terms of section 51 of the Municipal Systems Act to establish and organise the administration in a manner that would enable the municipality to achieve the objects of local government as set out in section 152 of the Constitution. On 18 July 2012 the Executive Council resolved to terminate the intervention at Okhahlamba municipality and to extend the intervention at Indaka municipality for a period of six months ending 31 December 2012. On 19 September 2012 the Executive Council resolved to intervene in terms of section 139(1)(b) of the Constitution at  Mtubatuba municipality for its failure to fulfil various executive obligations. The MEC for COGTA was authorised to appoint a representative to undertake the function in terms of section 51 of the Municipal Systems Act to establish and organise the administration in a manner that would enable the municipality to achieve the objects of local government as set out in section 152 of the Constitution.

Reasons for intervention in Okhahlamba municipality dated November 2009
Ms Dube explained that the intervention had been launched because Okhahlamba did not have a functional management team which contributed to the municipality’s dysfunctional state. The Auditor-General reports for 2004/05, 2005/06, 2006/07 and 2007/08, indicated that there were serious deficiencies in management systems and other accounting and financial controls and the Auditor-General issued a disclaimer audit opinion for two financial years and an adverse opinion in respect of the last year.

The 2007/08 Annual Report did not comply with section 121 of the Municipal Finance Management Act (MFMA) as no performance report evaluating the performance of the Municipality or of the Section 57 employees was attached. Council did not table or submit an oversight report as required in terms of section 129 of the MFMA. The Council did not have an established internal audit unit and audit committee as required in terms of sections 165 and 166 of the MFMA.

The municipality experienced serious financial problems evident from the poor cash flow and posted a deficit of R17 963 125 in the 2008/09 financial year. The accumulated deficit as of June 2009 totalled R24 517 042. Grant funding allocated for housing was utilised irregularly to finance the operations of the municipality. Unspent conditional grants to the sum of R20 196 551 were not cash backed. As reflected in the 2008/09 annual financial statements, general expenses increased from R11 306 725 in 2006/07 to R57 294 633 in 2008/09, resulting in a%age increase of 407%. The municipality failed to make payments to its creditors as and when due.

Reasons for intervention in Indaka municipality dated November 2009
The Auditor-General reports for 2005/06, 2006/07 and 2007/08, indicated that there were serious deficiencies in management systems. The Council had failed to address recurring issues adequately. As reflected in the Auditor-General report for 2007/08, the municipality had experienced serious financial problems evident from the poor cash flow, an accumulated deficit of R8.4 million was incurred as of June 2008. During this period the entity’s total liabilities exceeded its total assets by R1.9 million. Further reserves amounting to R6.5 million were not supported by cash.

Despite the Municipality being 99.7% grant dependant and not providing any services, the municipality had appointed seven Section 57 managers. The total salary cost incurred by the Indaka Municipality was 51% of the total operating expenditure. The Council was not able to exercise effective oversight over the administration and council decisions were negatively impacting on the finances and functioning of the municipality. This was evident in the over expenditure on the budget and poor grant management. Further, the municipality was not implementing an effective debt collection and credit control policy.  This was evidenced by the increasing outstanding debt.

Reasons for Intervention in Mtubatuba Municipality dated October 2012
In June 2012 Cabinet resolved to institute a discretionary intervention at Mtubatuba Municipality in terms of Sections 136-138 of the MFMA, for a period of three months as a result of unfavourable financial conditions. The Financial Administrator appointed in terms of the discretionary intervention drafted and commenced implementing a financial recovery plan which sought to address the causes of the financial crisis.
There appeared to be an extremely low probability of the intervention support team achieving its objectives in the area of financial recovery and implementation of internal financial controls as the council was failing to fulfil its executive obligations necessary for the effective functioning of the municipality.

Despite the municipality being in a precarious situation in respect of finances and operating on a deficit budget, certain councilors were attending seminars in other provinces, incurring unnecessary expenditure which impacted on the financial crisis; the municipality had failed to appoint a service provider timeously to undertake the compilation of the second general valuation roll, which may lead to the municipality incurring a loss of property rates income; the council had failed and/or neglected to conduct performance assessments on senior managers; the council had entered into unsustainable contracts with certain service providers and is heavily indebted due to contracts that were signed and which currently bind the municipality.

The municipality had neglected to pay creditors within 30 days as stipulated in the MFMA, which exposed the municipality to the risk of legal action. The Department had recently received correspondence from the legal representatives of a judgment creditor advising that after obtaining default judgment against the municipality, the creditor had been instructed to proceed with the attachment of municipal assets for the liquidation of the judgment debt.

The municipality was facing litigation due to cancellation of a contract with a security company for R1 400 000. In terms of section 136(4) of the Municipal Finance Management Act, if a municipality as a result of financial crisis, is unable to meet its financial commitments, as a result of which the conditions for an intervention in terms of section 139(5) are met, then the Executive Council must intervene in the municipality in terms of section 139 of the Constitution.

Based on the current cash flow, it appeared that the municipality would be without sufficient cash resources to pay debts, as they became due from March 2013, unless negotiations to reduce monthly payments succeed. The municipal public accounts committee was still not functional within the municipality.

For these reasons, amongst others, the Executive Council resolved to intervene at Mtubatuba municipality in terms of section 139(1)(b) on 19 September 2012.

The scope of the administrators appointed at Indaka and Okhahlamba
The scope of administrators appointed at Indaka and Okhahlamba in undertaking to establish and organise the administration in a manner that would enable the municipality to achieve the objects of local government, as set out in section 152 of the Constitution, were required to: devise a turn-around strategy for the municipality; ratify all decision of the municipal council and /or its committees, prior to implementation; ratify all decisions taken by Municipal Manager and section 57 Managers in terms of delegated or original authority; ensure implementation of Council resolutions by the administration; implement a system to control and approve all expenditure; implement all governance systems and procedures including appropriate councillor oversight mechanisms; ensure implementation of financial systems, policies and procedures; ensure implementation of the Municipal Property Rates Act; set out a specific strategy for addressing the municipalities financial problems, including a strategy for reducing unnecessary expenditure and increasing the collection revenue; prepare the adjustment budget for the 2009/2010 financial year; and review  the organisational structure of the municipality

Scope of the administrator appointed at Mtubatuba
Similarly, the administrator appointed to Mtubatuba, in undertaking the function assumed by the Provincial Executive Council must, inter alia: undertake all fiscal and financial management functions at the municipality, including being a signatory on the municipal banking account; ratify all decisions of the municipal council and its committees, prior to implementation; ratify all decisions taken by Municipal Manager and section 57 Managers in terms of delegated or original authority; devise a turnaround strategy for the municipality; ensure implementation of council resolutions by the Administration; implement a system to control and approve all expenditure; implement all governance systems and procedures including appropriate councillor oversight mechanisms; ensure implementation of financial systems, policies and procedures; ensure implementation of the Municipal Property Rates Act; set out a specific strategy for addressing the municipalities financial problems, including a strategy for reducing unnecessary expenditure and increasing the collection revenue; prepare the adjustment budget for the 2012/13 financial year; review  the organisational structure of the municipality; and implement the findings of any forensic investigations undertaken by the municipality or the MEC in terms of section 106 of the Local Government: Municipal Systems Act 32  of 2000, including criminal, disciplinary and civil action.

Progress which resulted in the termination of the intervention at Okahlamba
The verification and assessment of the existing Valuation Roll and the compilation of the supplementary Valuation Roll for 2011/12  was done and completed in April 2011, with very few objections received, and with all subsequently resolved. For continuous maintenance of the Valuation Roll, a service provider had been retained by the Municipality and an advert for a service provider to assist with the new process was already out, for the 2013/14 assessments. The debt book of over R18 million in the financial year 2010/11, was drastically reduced to the extent of at least 50%. The collection rate had increased from 36% in 2010/11 to 61, 44% accumulatively, as of 30 April 2012 against the annual target of 75%. Strict Expenditure Management measures resulted in the Municipality having a total R81 million in cash reserves including all cash-backed conditional grants totaling just over R40 million. The Municipality was able to accurately report on a monthly basis on revenue, expenditure, cash flow, debt recovery and creditors.

All Council statutory, administrative and functional structures had been established and were all operational, including a fully functional audit committee and internal audit unit as well as Integrated Development Plan (IDP), Budgeting and
Performance Management System (PMS) procedures. Whilst the Municipality took a resolution binding itself to the achievement of Clean Audit by 2013/14, it is highly likely that all queries raised by the AG during the last financial year may be resolved by this financial year, which may result in the municipality obtaining a clean audit.

The Municipality had compiled an Infrastructure Maintenance Plan which had been implemented since June 2012, where plant and equipment was sent to each ward for a period of 10 days to ensure that all existing infrastructure was maintained. The Municipality experienced difficulty in spending grants relating to Municipal Infrastructure Grant (MIG)-funded and Small Town Development-funded projects during the period of between October 2011 and March 2012, with assistance from COGTA where a dedicated project manager was sourced, all these projects were moving at the time of the presentation, and were within the acceptable expenditure levels. Electrification project funding which was nearly lost due to non-expenditure and reporting had been re-secured with the Implementing Agent already appointed. All senior posts were filled, to the exception of a Director of Corporate Services. Based on investigations by
PricewaterhouseCoopers irregular payments had been identified and criminal cases had been instituted.

The main reason for the extension of the intervention on 13 December 2011 was the fact that the municipality lacked a senior management team to sustain the progress and to implement any outstanding intervention priorities. Based on the fact that the senior posts were filled and that there was considerable progress in respect of the intervention priorities, the intervention is to be terminated on 13 December 2012.

Progress in Indaka and reasons for extension
The status on Financial Management was fair. The secondment of a COGTA financial expert has had a major positive effect on the implementation of the Recovery Plan on financial management. The expert together with the administrator was in the process of reconstructing the financial records of Indaka, going as far back as 2009/10 on certain transactions to date. Various financial irregularities had been reported and because it was obvious that certain activities were done deliberately without the administrator’s knowledge, the intention of the administrator is to issue civil summons to recover all the irregular and fruitless expenditure from the former Municipal Manager and affected Councillors.

The majority of priorities in respect of governance as identified in the recovery plan had been met. The Internal Auditor was effective, but was stifled by the management’s failure to either respond to the audit findings or failure to implement the recommendations. It appeared that there is poor leadership in this municipality, although, all the necessary Policy Frameworks are in place. The problem was a lack of implementation. According to the administrator’s assessment, the Council’s Oversight and Performance Management and Reporting, remained a concern and much work was yet to be done, despite efforts being made by the administrator in this regard.

Despite some improvements, it was clear that there were still serious challenges which had been confirmed by the administrator.
In the year ended June 2011, the Municipality incurred unauthorised expenditure of R4.644 million and irregular expenditure of R22.500 million; totalling R27.2 million. In January 2012, the Mid-Year Review established a number of irregular, unauthorised and fruitless and wasteful expenditure which were reported to the Council as part of the Mid-Year Review report. The copy of the report was forwarded to the Department as part of monthly reporting. The administrator advised the then Acting Municipal Manager (Mr Maphanga) to report these irregular expenditures, in terms of section 62 of MFMA for general failure of the system and section 32(4) of the MFMA, to the MEC responsible for Local Government in the Province and the Office of the Auditor-General. The administrator said that such irregular expenditures had not been reported to the MEC and the Auditor-General.

There had been various irregular financial activities resulting in an increase in unauthorized, irregular, fruitless and wasteful expenditure, which continued under the stewardship of the Administrator, without his knowledge. This reflected defiance by the administrative and political leadership of the municipality and undermined good governance. In addition, the administrative leadership of the municipality was still unstable with key senior positions of CFO and Director of Technical Services remaining vacant. The Mayor and Council were still unable to exercise effective political oversight and strong leadership to promote financial prudence and good governance. Consequently, the intervention was extended at the Indaka Municipality.

Progress at Mtubatuba
Ms Dube, the KZN MEC, met with the new Council of the Municipality on 28 September 2012, informing the municipality of the reasons for the intervention and the appointment of her representative and his role in respect of the intervention. The representative, Mr K Mpungose, was introduced to the Council and the senior management on 3 October 2012. The representative was in the process of assessing the status of the municipality and preparing a sustainable recovery plan with measurable objectives attached to reasonable time frames.


COGTA KZN had hoped that the new Council would mean a fresh, more positive effort to tackle problems. However, there was no cooperation, particularly from the Councillor’s side, and no appreciation of the difficulties the municipality was facing, even when it was showing signs of service delivery failures. For example there had been water shortages as a result of poor governance as well as poor oversight from the side of the councillors.

COGTA KZN was still experiencing problems and their presence was still resented by certain political parties. Nonetheless a team from the Treasury was helping to devise a turnaround strategy. A further problem was that the Municipal Manager was also studying and president of his university’s Student Representative Council, which meant that he was infrequently in his office. COGTA had also received reports that the CFO in the municipality had resigned. They were not proud of the situation but were hoping that despite all these challenges they would be able to ensure that communities did not suffer because of the instability that was present within the municipalities.

Discussion
Mr A Matila (ANC, Gauteng) asked how regular the intervention was and what the time frame of the intervention was.

Ms Dube responded that the intervention was full-time and that monthly progress reports were produced.

Mr D Bloem (Cope, Free State) asked why there had been continuous extension of the intervention in Indaka. What was the contract signed between the Department and the administrator, and could the Committee have a copy of the document?

Ms Dube responded that COGTA KZN had originally hoped that this intervention could be ended at the same time as Okahlamba but unfortunately they had not made enough progress. A new administrator had been appointed, as the previous one had felt that he was not getting enough cooperation or making any progress. The new administrator had made some progress but was still struggling. The municipality had been given until December. Part of the reason why this had been extended was because the elections last year had brought in a new Council, which had been given six months in the hope that it would perform better than the last one. However, the administrator was still not getting the cooperation he needed.

As things looked at the time, it seemed COGTA KZN would not be able to terminate in December, as it would be irresponsible to leave the municipality in the condition it was in currently.  The absolute last resort would be to disband the municipality, but there would be serious political ramifications for that. A carefully calculated assessment would be needed.

Ms Dube undertook to make the contract available to the Committee.

Mr J Gunda (ID, Northern Cape) asked if there were goals with specific time frames for when improvements should be made.

Ms Dube responded that when COGTA KZN began working with a municipality they had terms of reference for the intervention, and this was where the monthly reporting was derived from. This was also what the decision to continue with the intervention or not, was based on. In many instances they had a recovery plan which was accompanied by clear financials. In addition COGTA KZN would always devise exit strategies to ensure that improvements were sustainable and there were clear guidelines for follow-up. 

Mr Matila said that the Committee had been to Indaka and had experienced the non-cooperation and seen the political instability. Reports that the Committee was receiving from the province confirmed what they had experienced there, and suggested that there had been no major changes. He suggested that the Committee take a second visit to Indaka in order to better judge how the Committee could assist.

Mr Gumba asked if there was a way that the province and the Committee could resolve this, as service delivery was crucial. If certain individuals were withholding service delivery then they needed to be held accountable.

Mr Bloem said that for the Committee to help, the MEC needed to be open with them. She had referred to the politicising of the situation but had not said who was in control in the municipality. He believed that the municipality should be disbanded as it was the people on the ground who were suffering. It was not necessary for the Committee to visit the Indaka municipality. 

The Chairperson reminded Mr Bloem that the Committee must act within the Constitution. The disbandment of the municipality would require executive authority. He believed the Committee should not rule out the option of a further visit.

Ms Dube responded that the governing party was the National Freedom Party (NFP). She cautioned that whatever decision was taken had to be calculated, as disbanding the Council may not be the solution.  It would be an expensive exercise, as it would require elections to be held within three months and parties to campaign again, and it may happen that the same problematic people were re-elected. This was what had happened in the 2011 election.  Thus disbanding may not get rid of the problem and COGTA had to rather look at how to assist institutions to progress and not compromise on service delivery. This should be the central focus. At the time, the Provincial Government was conducting programmes in the municipality to ensure that basic services were being delivered, which was why many people living in the area were not aware of how badly the municipal government was performing.

Mr Bloem interjected that that was why the same people were being voted in repeatedly. 

Ms Dube continued to say that patience was required, and some progress was slowly being achieved. When the Committee had last visited there had not been a manager in place, but now there was one. The weakness was on the councillor’s side. The councillors were not able to assert themselves so correct decisions were not taken. In civil recoveries, if it was found that irregular expenditure was as a result of council’s decisions, then those individuals would be held accountable. COGTA KZN was trying to be more aggressive about these issues without being seen as politicising the matter. They sought to avoid political issues preventing the work that were trying to do in the municipality.

Mr Matila said that when the intervention took place, the Inkatha Freedom Party was the driver there. Residents there had indicated that they would withhold their payments for services if council did not act.

Ms Dube responded that Indaka had been under IFP control but was now under the NFP. However, it was the same councillors which had moved from one party to the other, and remained problematic.

The Chairperson expressed concern about the Municipal Manager who was also on the SRC and was found to be inaccessible. 

Ms Dube responded that COGTA was investigating the issue. The person in question had also disrupted the SRC election which had been held recently.

Endorsements
Mr Matila proposed that the Committee endorse the recommendations for the termination of the
Okhahlamba intervention, Indaka intervention extension and the intervention in Mtubatuba but receive regular briefings on the area so that the Committee could monitor the situation.

Ms Dube responded that COGTA expected that the situation in Mtubatuba could be turned around. Although it was a small municipality it had a lot of potential, particularly for tourism. It had active rate-payers associations, but had to stop the history of politicisation of the administration. This resulted in administrations hiding behind their politics for inefficiencies.

The Chairperson asked for further comment on endorsing COGTA KZN’s recommendations.

There were no objections and the recommendations were endorsed. 

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