Limpopo Provincial Department Cooperative Governance, Human Settlements & Traditional Affairs response to reports on audit of local government 2010/11

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Meeting Summary

The MEC for Cooperative Governance, Human Settlements and Traditional Affairs in Limpopo briefed the Committee on the action plans that his provincial Department was following, to respond to the Consolidated General Report of the Auditor-General on the 2010/11 and 2011/12 audit outcomes of Local Government. He firstly highlighted the specific characteristics of Limpopo, but noted also that it shared some of its challenges with other rural provinces, specifically the difficulty that it had in attracting skilled professionals such as accountants, technical managers and administrators with the necessary experience to run a municipality, largely because of the fact that there were few good schools in these areas, which made professionals unwilling to re-locate. The minimum requirement in the legislation was that a Chartered Accountant was needed as a Chief Financial Officer, but in practice it took an inordinate time to find the right candidate and some municipalities had had to accept lesser qualifications. Another very important factor was the need to get stability at management level, as shown by those municipalities that had achieved success. The particular problems in Limpopo for most municipalities included difficulties in accounting for water transactions between district municipality and local municipality, as many were also water service authorities. Although the district municipalities were supposed to be a temporary intervention, in practice many had not managed to hand over their functions. Strong political leadership was identified as another vital requirement.  

The root causes on negative audit findings were summarised. These included lack of shared vision by political and administrative leaders, delays in implementing corrective measures, lack of accountability which had virtually become entrenched, failure to adhere to Municipal Finance Management Act requirements around monthly reporting. Other problems that were frequently cited by the Auditor-General included non-compliance with supply chain management regulations, unauthorised, fruitless and wasteful expenditure, which had increased, non-compliance with Generally Recognised Accounting Principles, including those on asset management, lack of supporting documents, incomplete statements, and ineffective governance and management and knowledge.

The MEC stressed that the role of provincial and national government was essentially limited to that of support and that it was unable to interfere in the day-to-day workings, or indeed decisions of municipalities, such as on tenders and processes. This was also emphasised in response to several members’ questions as to the specific interventions that the provincial Department was planning. However, the Provincial Department was funding the placement of Resident Accountants at many municipalities, who would play a supportive and training role, and clear the 2010/11 audit queries. The challenges were outlined as including the limited skills base in the country, and the lack of willingness to work in rural municipalities, the high vacancy rates, lack of support from service providers, also attributed to migration, the fact that supporting documentation was often not available, poor internal controls, failure to implement recommendations of internal audit and audit committees or to implement a remedial plan. The Department was trying to assist municipalities to develop performance indicators, and was monitoring functionality of audit and performance committees, was trying to strengthen the oversight mechanisms, recruitment, and the Provincial Capacity Building Strategy, focusing on financial management training for councillors and officials.

Members were particularly concerned with the huge amounts of unauthorised expenditure, and asked how this had happened without being identified at a much earlier stage. It was suggested that if the universities were not producing the right skills, government should perhaps consider setting up its own training courses, a suggestion that was to be taken to the Minister. Members commented that stability at political leadership level was indeed important, and stressed the importance of getting value for money. They were adamant that consequences should be imposed for inappropriate behaviour, wondered if the rest of the province would adopt the good practices shown in Waterberg and another municipality, discussed the possibility of section 139 interventions, and the new Forums. The Committee agreed to hold further interaction, and delve more deeply into specific issues, and that the skills problems must be addressed by a national strategy.

Meeting report

Limpopo Provincial Department Cooperative Governance, Human Settlements & Traditional Affairs response to reports on audit of local government 2010/11
Mr Clifford Motsepe, MEC for Cooperative Governance, Human Settlements & Traditional Affairs, Limpopo,  briefed the Committee on the action plans that the provincial Department of Cooperative Governance, Human Settlements & Traditional Affairs (the Department) had drawn, in response to the 2010/11 and 2011/12 consolidated general reports on the audit outcomes of local government.

He outlined that Limpopo was a rural province with a contrast of urban and metropolitan areas. The challenges were not unique and many other provinces such as the Eastern Cape and KwaZulu-Natal had similar problems. The fact that it was a rural province made it very difficult to attract skills such as accountants, technical managers and administrators who would have the know how and experience in running municipalities. It had taken twelve months to hire a Chief Financial Officer (CFO) in the Sekhukhune District Municipality, because the district was a water service authority with an annual budget close to R1 billion. The minimum requirement was for a Chartered Accountant, yet the lack of good schools meant that many professionals were unwilling to locate there. Eventually, the person hired was not a Chartered Accountant.

Mr Motsepe turned to the comparative overview of audit outcomes over the last four financial years in all 30 municipalities. While Limpopo did not do well, as a province, in the 2010/11 financial year, two municipalities received clean audits. In the 2011/12 financial year only one of the 30 municipalities, Waterberg District Municipality, received a clean audit. There was a steady decrease in the number of municipalities that received disclaimers over the last four years, and the 19 disclaimers of the 2008 financial year had dropped to 10 by 2011/12.

The Waterberg District Municipality was one of Limpopo’s best performing municipalities, having had two unqualified audit opinions and two clean audits. The main reason was that it had stability at management level over the past seven years, a vital factor. It was also the only district municipality in the province that was not a water service authority (WSA). The others were, and it was very difficult to account for water transactions between district municipalities and local municipalities in the other four districts. He explained that the White Paper on Local Government of 1998 clarified that districts were formed as temporary institutions, with the intention that at some point the districts would have to give way to local municipalities. There had been engagements at various forums to re-look at their position, but they were not yet ready to devolve to local municipalities, which remained a problem. If that did not happen, there would remain challenges in accounting for water related transactions. In Waterberg, the powers had already devolved to local municipality, which was why the district itself did so well.

The Sekhukhune District had three disclaimers in the last four years and the audit opinion for 2011/12 was still pending. This was a water service municipality, and one of the poorest municipalities, yet it had huge potential for South Africa and was declared a Presidential nodal point because of its population density and location that made it strategic to the development of the province and country.

The Tubatse municipality had a high concentration of untapped platinum. The service provider was currently completing a feasibility study to package the project to enable the province to tap into the economic potential of that municipality. That had already been done with Lephalale, which was one of the eighteen strategic infrastructure projects identified by the Presidential Infrastructure Coordinating Commission.

Mookgopong, in the Waterberg District, also had challenges and received disclaimers in 2008/09 but then moved in the next two years to receiving qualified reports. A very good CFO was appointed with the right competence and skills, and it was expected that in the next financial year it should get an unqualified audit opinion.

Mr Motsepe stressed that political leadership also played a crucial role in the audit outcomes of municipalities. Where there was no proper leadership at political level, improved outcomes could not be expected. Year after year the Office of the Auditor-General (AG) had made findings around lack of monitoring, leadership and oversight, by those charged with political responsibility in the municipalities.

Mr Motsepe summarised the root causes of negative audit findings, which included:
- Lack of shared vision by those who were leading the municipality. He said that the shared vision could not be realised if administrators and politicians kept relinquishing their positions at that level;
- Delays in implementing corrective measures, which generally meant the same problems were carried over to the next financial year.
- Lack of accountability, and lack of consequence for inappropriate behaviour. Often, charges were not laid against, for instance, CFOs who had not performed in line with their contracts, reaching the level where this was now virtually an entrenched culture. The Province had now started taking disciplinary actions and fired those who acted outside the law.
- Lack of credible monthly reporting, as required by the Municipal Finance Management Act (MFMA).

He also outlined some other additional audit findings that were commonly cited, which included:
- Non-compliance with supply chain management regulations;
- An increase in unauthorised, fruitless and wasteful expenditure. He summarised the figures for 2010/11 and 2011/12 as, respectively, R546 million and then R738 million for unauthorised expenditure; R945 million and R1.157 billion for irregular expenditure, and R40 million and R22 million for fruitless and wasteful expenditure.
- Asset registers and asset management procedures were not compliant with Generally Recognised Accounting Principles (GRAP)
- Lack of supporting documents
- Findings around completeness of revenue statements
- Ineffectiveness of governance structures
- Lack of application, skills and knowledge of financial systems.

Mr Motsepe explained why so much time was taken to fill Municipal Manager and CFO positions. He emphasised again that Limpopo was a rural province that found it difficult to attract new residents. Very often, applicants attempted to move from municipalities in other provinces where they were not performing very well, had been fired or failed to achieve a contract renewal. Limpopo looked for people with good track records rather than merely filling its posts with those who in fact did not have the right skills. It was extremely difficult to get chartered accountants with public service experience.

The 2011/12 audit remedial plans had been developed and submitted by municipalities to the Provincial Department, who in turn assessed the audit remedial plans, provided feedback to the municipalities, and monitored the implementation of the remedial plans, including ensuring that supporting documents were available when it was claimed that matters were resolved. The AG had indicated a general improvement in that regard.

Mr Motsepe then turned to appointment of Resident Accountants. Section 163 of the Constitution guaranteed the independence of local governments, with provincial government being given only a supporting, not interfering role. The MEC similarly had powers to support, not intervene. The level of support offered was that the Provincial Department funded the appointment of Resident Accountants to supplement and complement the municipality’s financial management ability. Three companies were appointed for Sekhukhune, Greater Giyani and Musina, Makhado, Ba-Phalaborwa and Modimolle. They had started in June 2012. Advertisements were placed for the other municipalities.

The scope of work for the Resident Accountants comprised:
- Providing hands on support on technical financial management with regard to the closure of the financial year, with specific emphasis on the municipality’s financial records being in order.
- Skills transfer to the municipal staff
- Preparation of  financial statements;
- Ensuring that working papers were available and in order, before preparing the financial statements, as evidence for auditing purposes
- Assessing the state of financial management in the municipality and providing recommendations on areas of possible improvement.
- Finally, and most importantly, clearing the 2010/11 audit queries.

In relation to project implementation and monitoring, the Department established an MEC/Mayors Forum, co-chaired by the Provincial MEC and Provincial Treasury. The Forum comprised of Executive Mayors or Mayors, Municipal Managers, the AG and South African Local Government Association (SALGA) and it met on a quarterly basis. Mayors reported on progress in ensuring the ability to reach the targets of Operation Clean Audit in 2014. Monthly reports of Resident Accountants were signed off by respective Municipal Managers and Chief Financial Officers, and submitted to the provincial Department. Oversight responsibility governance structures were put in place.

Challenges:
Mr Motsepe outlined the major challenges, as follows:
- There was a limited skills base for financial management. South Africa was not producing people with financial management capacity. People moved to the cities for better salaries, it took time for the new person to acclimatise, with serious impact on the project.
- Both the Budget and Treasury Units showed a high vacancy rate
- There was a lack of knowledge and skills, due to migration, and lack of support from financial systems providers.
- There were still problems with the non-availability of supporting documents.
- Lack of proper internal controls, such as adhering to management policies and treasury regulations around  safeguarding of assets was still apparent
- There was still non-implementation of recommendations made by the internal audit and audit committee
- Non-implementation of audit remedial plans also posed a problem
- Lack of skills in respect of municipal accounting procedures and standards was prevalent

Interventions:
Mr Motsepe outlined some of the steps that Limpopo province had taken to try to redress the situation.
The Department assisted municipalities to develop performance indicators. There was continuous monitoring of functionality of Audit Committees and Performance Committees. The oversight committees were being strengthened. The Department had also reviewed the implementation of Operation Clean Audit plans, and was monitoring the implementation of audit remedial plans. The municipalities were being monitored and assisted with the implementation of the rates, and with the valuation appeals board.

The Department was also assisting municipalities with recruitment to section 56 positions. The legislation outlined minimum qualifications and experience for Municipal Manager and CFO appointments. In terms of the amendments to the Municipal Systems Act, an MEC would have to concur in the appointment of an official who had been recommended for appointment by the Council, and would have to ensure that the person met the minimum competency level. Finally, the Department was implementing its Provincial Capacity Building Strategy, focusing on financial management training for councillors and officials.

Discussion
Mr D Joseph (Western Cape, DA) asked whether this presentation covered all the portfolios of Cooperative Governance, Human Settlements and Traditional Affairs.

Mr Motsepe responded that it did not, as his presentation was confined to the Select Committee’s specific request that he present on the Department’s action plans in response to the 2010/11 Consolidated General Report on Audit Outcomes of Local Government. Local government comprised the 30 municipalities, but excluded his Department, Traditional Affairs and Integrated Human Settlements, who was responsible for housing. The report focused on performance of the 30 municipalities in the Province.

Mr Joseph was concerned that despite so many universities in South Africa, the country was not able to produce engineers and accountants to manage the municipalities. There seemed to be inconsistencies in intake and production of sufficiently-qualified graduates. He suggested that perhaps government should look to found its own school for municipalities within the universities, in line with the National Development Plan.

Mr Motsepe responded that there were 21 universities in the Republic of South Africa. On an annual basis, these universities, Technikons, and Further Education and Training (FET) Colleges produced graduates, but the question was whether they emerged with the relevant skills, competence and experience required by local government. He pointed out that having a BSc.Eng did not make a person into an engineer, nor a law degree a lawyer. It was true that the academic skills were there, but it must be remembered that, for instance, a graduate also had to work for a recognised company for a number of years before becoming a professional engineer. The question was whether, after all the years of training, that person would then want to work for a rural municipality. The same applied to accountants, who often found that after their years of study and articles, the private sector or even foreign companies made more attractive offers. The public service, in general, was not attractive enough. The same also applied to administrators and Municipal Managers. Good CFOs were hired by the private sector or foreign countries, meaning that those left behind were not the best candidates, which was why the situation in regard to audit outcomes had deteriorated.  The National Development Plan had diagnosed that problem and said these were the skills the country needed. He welcomed the recommendation to produce schools to meet the requirements of municipalities.

The Chairperson intervened and said that that point would be noted for the Minister.

Mr Joseph suggested shortening the 17 points in the Table of Contents to the key priorities.

Mr Motsepe responded that he wished to be open and transparent, and he would like to have put in more detail, had time permitted.

Mr Joseph noted that attracting skills to the rural areas was a big problem.

Mr Joseph was interested to know what the MEC meant by stability at management level. He considered that this encompassed political leadership as well as administration. There must be responsibility at a political leadership level.

Mr Joseph referred to corrective measures and asked if the “we” who had to ensure implementation of corrective measures meant the senior managers in the provincial Department.

Mr Joseph noted the lack of monthly reports, but said that the problem actually went back further, because if daily and weekly reports were generated, the monthly reports would become automatic.

Mr Joseph asked why and how the fruitless and wasteful expenditure happened. Part of tender procedures were that payments should be released after progress was shown. However, this was not happening. The officials had to account properly for why so much money was spent with nothing to show for it, while the masses were suffering. He was pleased to hear that the money was being recovered.

Mr J Gunda (Northern Cape, ID) asked for clarity on the additional key common audit findings. He said that he found it impossible to understand how, in one financial year, there could be such vast amounts of unauthorised, and indeed irregular expenditure, without someone, including the MEC, picking this up.

Mr Motsepe explained it was a conglomeration of amounts contributed by all the different municipalities, not only one.

Mr Gunda appreciated Mr Motsepe’s honesty in saying there was a lack of political leadership. However, he disagreed that there were no people in Limpopo qualified to do the work. Taxpayers’ money had to be spent efficiently, effectively and wisely, in order to get the best service delivery to the people.

Mr Motsepe agreed that, particularly because this was taxpayers’ money, value for money must be obtained throughout.  That could only be done if people had the right skills and competence, and were in the right positions. Leadership at political level had capacity to enforce those rules and regulations.

Mr V Manzini (Mpumalanga, DA) congratulated the Waterberg District Municipality and also Mogalakwena Municipality for their good audit outcomes. He referred to the root causes that included lack of shared vision, and people not working as a team. He wondered if the delay in implementing corrective measures seemed to be purposeful.

Mr Motsepe responded that it was certainly not. The presentation indicated the root causes, but also  indicated what measures had been put in place in the form of interventions, such as appointing Resident Accountants to complement and supplement the competence of the municipalities. . The Department had diagnosed the problems and came up with corrective measures.

Mr Manzini was concerned at the lack of consequence for inappropriate behaviour, which must be remedied. Municipalities dealt with taxpayers’ money and must be accountable.

Mr Manzini was also concerned at the non-compliance with supply chain management. It was important that that situation be remedied.

Mr Motsepe reiterated that he only came in at the tail end of the process. The municipalities were an independent sphere of government and the Provincial Department was not allowed to interfere in their operations on a day-to-day basis.

Mr Manzini noted that the MEC had picked up that there was an increase in fruitless and wasteful expenditure, but asked what was being done to remedy that. He commented that there was millions involved, and he wondered if this was accidental or deliberate. In relation to irregular expenditure, he noted that service providers were hired without the required certificates, and asked how that had happened.

Mr Motsepe responded again that local government was an independent sphere, with both legislative and executive authority. The municipalities appropriated their own budget and engaged independently on their procurement processes. He reiterated that as a provincial MEC he had no authority to interfere with these processes. If the local government chose to appoint a person or company that did not have the requisite competence, and ultimately that company did not perform in terms of the agreement, the MEC was only involved in doing an assessment, at the tail end of the process. He emphasised again that the Constitution had specified that there were three spheres of governance, and that although they were cooperative in their operations, they had distinct functions and powers.

Mr Manzini considered that fruitless and wasteful expenditure was mostly due to people being paid without the work being done. He wondered if there was collusion between the inspectors, which brought the municipality down.

Mr L Nzimande (KwaZulu-Natal, ANC) acknowledged that this presentation gave the Committee a picture of how municipalities were functioning in Limpopo. The presentation talked to section 100 interventions but these issues were not in that league. He noted the important interventions, such as the MEC and Mayoral Forum and said it was important that people moved together to coordinate, as this could be very effective. This could also help to redress the fact that those who failed to perform in one municipality would seek to join another.

Mr Nzimande referred to the water service challenges, and asked if, following the example of Waterberg, the rest of the province would move in the same direction. He wondered what mitigatory action was taken to bring matters to normality, although he did accept that the policy-making was at a different level.

Mr Nzimande noted that there was a quest to shorten the period dealing with vacancies but commented that it was critical to fill the financial posts to improve the audit outcomes. He wondered, from the presentation, if Limpopo could indeed meet the target of clean audits by 2014, as the picture presented was not promising.

Ms D Rantho (Eastern Cape, ANC) referred to the root causes on audit findings. She pointed out that the MEC was vested with powers. If people were not doing as they should, such as not implementing corrective measures, the Office of the MEC had to do something about that. She asked what steps were actually being take to rectify the situation.

Mr Motsepe responded that he had deliberately referred to section 163 of the Constitution. The slide on municipal governance structures referred to the established oversight bodies. The Municipal Public Accounts Committee (MPAC) was established as an oversight body that should be able to hold municipalities, via councillors and mayors, responsible for their actions. Interventions were indicated for when challenges were realised. The Provincial Lekgotla took a resolution that mayors and senior management must be responsible for non-improvement on the financial management issues, failing which there would be consequences such as having to vacate their positions.

He said that the MEC did not have powers to go into a municipality and ask the mayor, for instance, to produce a plan within three months, failing which that mayor would be fired. He could only support, encourage and train, or the final intervention would be to put a municipality under administration in terms of section 139 procedures, although the experience was that did not generally work.

Ms Rantho said the MEC for the Eastern Cape had a forum involving the MEC and municipalities, which worked very well. She asked if something similar existed in Limpopo.

Mr Motsepe responded that in Limpopo a forum was established where mayors, provincial treasury and municipalities would meet, and this was similar body to that of the Eastern Cape.

Ms Rantho said Limpopo had a university, and, given the lack of accountants, she wondered if the students from the university there should not be recruited to assist in developing matters.

Mr Motsepe responded that the University of Limpopo had only recently been accredited to offer courses in chartered accountancy. He repeated that even after graduating, the students still needed to have exposure to practice. It took a minimum of twelve years experience before a good CA would be able to run a municipality of the nature of Polokwane.

Ms Rantho was also concerned at the current situation around the filling of Municipal Managers and CFO posts, and wondered if there was any hope that those vacancies would be filled within the next three years.

Mr Motsepe said they would be filled when people with the right qualifications and experience were found.

Mr Gunda recalled that during “SALGA Week” there was a specific municipality, whom he thought from Limpopo, that was cited as having moved from an adverse opinion to a clean audit. He suggested the MEC portray such good examples to other municipalities.

Mr Motsepe said all was not gloom and doom in Limpopo, as good things happened there also, and he agreed that the municipality Mr Gunda had referred to was in Limpopo, and had given a presentation to Parliament so that others could learn from its success.

The Chairperson summarised the recommendations that the Committee would be making in its report, as follows:
- The Committee would need to interact with the Province and the MEC, and arrange for another presentation, when there would be deeper engagement on certain key issues, perhaps comparing examples from two municipalities, one doing well and one doing badly, to give the Committee a greater understanding and formulate ways to assist
- The problems around skills needed to be addressed by a national strategy. There needed to be debate on whether one or two institutions might run dedicated programmes to produce the skills required, although there was still a long road to produce skills required in the public service.

The Chairperson thanked Mr Motsepe for a comprehensive and empowering presentation.

The meeting was adjourned

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