Municipal Finance Management Bill: chapter 10

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Finance Standing Committee

04 November 2002
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Meeting report

FINANCE PORTFOLIO COMMITTEE
5 November 2002
MUNICIPAL FINANCE MANAGEMENT BILL: CHAPTER 10

Chairperson: Ms Hogan (ANC)

Relevant Documents:
Municipal Finance Management Bill: Draft of 13 September
Working draft of Chapter 10: Financial Reporting and Auditing
Working draft of Chapter 12: General Treasury Matters
Auditing of Performance Measurements at Local Government Level: Response from Auditor General (see Appendix)

SUMMARY
The Committee discussed the latest draft of Chapter 10 of the Municipal Finance Management Bill which deals with Financial Reporting and Auditing. The Auditor General was invited to the meeting as the Committee had concerns about the ability of the Auditor General's Office to audit performance measurement in all the municipalities.

MINUTES
The Auditor General, Mr S Fakie, Mr J Conradie (centre manager) and Mr A Kameldien (legal advisor) represented the Auditor General's Office. They were invited to participate in deliberations on Chapter 10: Financial Reporting and Auditing.

Mr Fakie thanked the Committee for the opportunity to appear before them. He said that they had looked at the provisions in Chapter 10, which focus predominantly on reporting, disclosure and auditing matters. The Auditor General's Office has principally no problems with the contents of the chapter. Further they have no problems with Chapter 10 and the requirements that have been put for audits in terms of the time frame. He added that there are many provisions around auditing matters, which are in line with what the Auditor General's Office is doing with the Public Finance Management Act. Many details around the audit such as the audit standards and how they would go about doing the audit have been taken out of the Bill and would be incorporated into the Auditor General Act. The Act is currently being amended. He said that the broad thinking is that the Municipal Finance Management Bill should just hold the requirements of what is expected from audits while the details would be in the Auditor General's Act.

Regarding broad input and the briefing of the Committee Mr Fakie commented that there are two aspects that he would like to touch on. Firstly he shared with the Committee the role the Auditor General's Office has played regarding the process of this Bill, and its coming into being. Secondly is the issue of auditing the performance measures at local government level.

Mr Fakie said that his office has been working closely with the National Treasury and the Department of Local Government (DPLG) and various other role players who had an interest in this Bill since 1997. The Auditor General's Office has continued to provide formal and informal input. He added that the process has been quite problematic and very frustrating but he does believe that this is part of the process of growth and learning. He shared his concern with the fact that this Bill has been in the pipeline since 1997. He believes that the prolonged process exposes government to increased risk of error and legislative conflict. The Bill should either be passed or returned to the very formal public process of publication with a minimal period of public exposure. He added that the latter option is extremely unattractive, as that will significantly prolong the period during which municipal financial management takes place in the legislative vacuum.

The Chairperson asked if she understood correctly that the Auditor General's Office wants the Bill resubmitted to Parliament and that there is to be a new set of hearings on it.

Mr Conradie clarified that they would prefer passing the Bill expeditiously.

Mr Fakie stressed that their main concern was for municipal auditors is the failure to pay audit fees. They have been part of the process since 1997 and they were quite clear on what should be in the Bill to ensure that the audit fees get paid. Provision was made for the payment of audit fees. He pointed out that in the last two weeks these provisions has been removed which leaves the Auditor General's Office in a situation where there is no assurance given of the payment of audit fees. He added that compliance should be a prerequisite and that they were not consulted when those provisions were removed.

The Chairperson said that in her experience as the chairperson of the Audit Commission she was part of the initial set of meetings with the Treasury, Department of Provincial and Local Government and the Auditor General's Office. She emphasised that the question of non-payment of auditing fees is really crippling the Auditor General's Office. Financially it is a huge problem for the Auditor General's Office. She added that they need a creative, swift remedial measure for the Auditor General's Office on this particular issue.

Mr Fakie told the Committee that, because of the complexity of this issue, they have had to take legal action against local authorities in the last two years as a last resort - which he stressed was the last thing they want to do. Legal action between two governmental bodies is not in the spirit of the Constitution.

The Chairperson said that in terms of section 139 of the constitutional amendment, which they are currently working on, certain interventions would be triggered when audit fees are not paid, because it constitutes non-payment for a service. She suggested that the Auditor General's Office and Treasury get together and discuss this issue. She added that this is one situation with which they can test the strength of the constitutional amendment.

Mr Fakie said that they would get back to the Committee on this. The next issue he wanted to deal with was the auditing of performance measures.

Mr Fakie presented a report to the Committee (see Appendix 1).

The Chair commented that in her understanding performance auditing arises out of performance output based budgeting. She added that she is not certain how one can start looking at the preparedness of municipalities to be able to do performance measures when output based budgeting has not been part of local, provincial and local budgeting. She then asked whether the performance audits, that is being discussed here, are the kind of performance audits the Auditor General's Office have been doing up to now, or are they talking about linking tightly the performance measurement to the output based.

Mr Conradie replied that some of the municipalities are well geared and in advance of the legislation, while in the rural municipalities it is a bigger problem. There is a fixed cost to implementing performance management. When you have few resources, like some of the smaller rural municipalities, it is a very significant cost fee.

The Chair asked for clarity about the difference between performance management and performance measures.

Mr Conradie replied that because the audit is normally system based this is performance management. An audit approach is based on getting reliance from the performance management system about the measures and indicators that municipalities report. If the performance management system is not working, they will have a difficult time auditing the measure.

The Chair expressed her concern that this is not what the Committee had in mind when talking about performance measures. She added that they are looking at outputs and not systems.

Mr Fakie said they tried to determine, with the help of the Department of Local Government, what the performance (output) measures are that municipalities should be measured against. He added that it might not be the ideal performance measures but they have to start off with some kind of measures. They agreed on this with the municipalities and they need a system that properly measures that performance.

Ms Hogan asked whether that is what was done in the pilot projects.

Mr Conradie told her that there are two types of audits. One is the old one that was used and the other one that they are doing now is an audit of information. He emphasized that in general the audit of information is output based. The pilot projects were audits of information.

Mr Pillay (National Treasury) added that in the 31 pilot studies the Treasury has undertaken on the budgeting side, they have noted that the municipalities have enormous problems understanding output based budgeting. He said that R1.5 billion is budgeted in the Medium Term Budget Policy Statement for a phased approach to capacity building over three years.

The Chair asked the Committee to look at the clauses in chapter 10 that have to do with the Auditor General. She reminded the Committee that the question they were asking is whether the Auditor General's Office is ready to immediately start on these performance audits. She added that it is now clear that they are ready but that the municipalities are not yet, but that the system will be phased in. She asked the Treasury to reconcile this with what is in the Systems Act.

Mr Pillay proposed changing the time period in clause 72 (2) and (3) from three months to two months for logistical reasons.

Mr Fakie agreed on the change.

Mr Dorfling (SALGA) expressed his concern with the time period municipalities have to submit their financial statements. He said that municipalities are not going to make it.

Mr Pillay replied that they are aware of this problem but that 23 of the 31 pilot projects they did the municipalities said they will be able to make it.

The Chair said it should be noted that the understanding is that the implementation of this will be in a phased way.

The Chair said that she had met with the Deputy Director-General of the DPLG, Ms Manche, to discuss the amendments compiled in the schedule attached to the 13 September working draft of the Bill. Ms Hogan said that Ms Manche had told her she was happy with the amendments but that subsequently she heard that the Deputy Director-General had problems with them. She asked the DPLG what their position was.

Ms Muller (Director: Municipal Finance Monitoring, DPLG) told the committee that there have been discussions and she is aware of a document, but that she is not sure if the Minister has signed off on it yet. She added that the comments have been relayed to the Treasury for their input.

The Chair commented that she has appealed before for everybody to start pulling together. She said that in a meeting with the Deputy Director-General she was assured that they were happy with the amendments and now they are being drawn back into the whole process. She said that she has been very accommodating with the DPLG, but that there does come a time when she has to start putting her foot down because this legislation has to go through. She added that the DPLG could have had the courtesy to at least send the Committee a copy of their comments. She emphasised that her frustration is reaching boiling point and she stressed that she is going to give them one more chance to look at the amendments and tell the Committee what problems they have. She also added that the DPLG had promised to send a Director-General or Deputy Director-General to these meetings, which had not materialised. She asked the DPLG to have discussions with the Auditor General's Office to make sure that there is an understanding about the phasing-in period and process.

Mr Dorfling commented that Clause 67 is too prescriptive. He added that it requires too much detail.

Mr Pillay stated the idea behind this clause is transparency.

The Chair asked whether all the information asked for in the clause is necessary. It was then decided to scrap clauses 67 (g)(ii), (h)(i) and (j).

Mr Dorfling emphasised that they are not bothered with what they have to report but with the particulars. He added that too much detail is asked for and that he was concerned about the size of the report. He would not have a problem if it were a summarized version.

Mr Conradie added that a set of accompanying guidelines on how to put together the report would be a good idea.

The Chair had it noted that the Auditor General's Office undertakes to issue guidelines.


Mr Zam Titus (Special advisor to the Minister of DPLG) drew attention to the difference between submit and table and their use in Clause 69.

The Chair asked Treasury to refer this back to the drafter, Adv Grove, for clarification on the use of the two words.

The meeting was adjourned to continue on the 11/11/02.

Appendix 1:
SUBMISSION BY OFFICE OF THE AUDITOR-GENERAL TO THE PORTFOLIO COMMITTEE ON FINANCE - 5 NOVEMBER 2002

AUDITING OF PERFORMANCE MEASUREMENTS AT LOCAL GOVERNMENT LEVEL: RESPONSE FROM THE AUDITOR-GENERAL

My office has been working in conjunction with DPLG, and with significant donor support, since 1998 to prepare for the implementation of municipal performance management. We have manuals, audit programmes, training programmes and other tools that are of a standard comparable with the best in the world. We also have performance measurement audit specialists on site and ready to complete our preparations for compliance with our mandate in terms of the Municipal Systems Act. In this process, my office has involved at least six South African audit firms to ensure that there are also skills and capacity available in the audit services market.

It should be noted, however, that the audit of performance measurements is dependent on the existence of compliant performance management systems at municipalities. We have been involved in preliminary audit work at municipal pilot projects at more than two dozen municipalities country-wide, and the results indicate that in general, those municipalities are not ready for the implementation of performance measurement as required by Inc Municipal Systems Act, in chief because inadequate resources have been allocated. A management letter of these pre-emptive pilot audits will be provided to the Department of Provincial and Local Government by the end of the year. The current prognosis therefore is that, unless all tiers of government take effective steps, the eventual audits will not be concluded on positively. In other words, the audit reports on municipal performance measurements could be qualified and not provide assurance to the public about municipal performance management systems in many cases. An approach has been developed to do this in the most constructive manner possible in the event that the situation is not resolved by August 2003, when the first reports have to be submitted for audit by municipalities.

The audit approach that we have developed will best compliment a phased implementation of the performance management requirements of the Municipal Systems Act; in fact we have identified a number of phases in the process which could be used by DPLG to regulate the phased implementation. What is important, is that performance management and measurement must be implemented to achieve credible improvements in local service delivery, and this should be entrenched in legislation without delay. There is in our view no option to withdraw the relevant requirements of the Municipal Systems Act.

In conclusion therefore, yes, auditors are ready for the auditing of performance measurements but there is a significant risk that municipalities may not be as ready, and that it will take a number of years of concerted effort to achieve compliance with the Municipal Systems Act in this regard.

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