Withholding/late transfer of equitable share; Department of Cooperative Governance BRRR; Demarcation Transitional Grant; Report on municipal forensic reports; MISA Post Audit Action Plan, in presence of Deputy Minister

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Cooperative Governance and Traditional Affairs

28 October 2015
Chairperson: Mr M Mdakane (ANC)
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Meeting Summary

The Department of Cooperative Governance (the Department) in the presence of the Deputy Minister, gave a presentation and tabled reports to the Committee on the progress made on various recommendations from the Committee. The Department firstly outlined the progress in addressing the recommendations of the Committee in the 2014 Budgetary Review and Recommendations Report. The first matter concerned the review of the method of determining the equitable share for local governments. A new formula was in the process of being implemented and would be updated every year. National Treasury and the South African Local Government Association  had assisted most of the affected municipalities with concluding payment arrangements with Eskom and the Water Boards, in order to ensure that their transfer of the equitable share would not be delayed. In response to Committee suggestions, the Department had strengthened the capacity of the unit supporting the Municipal Infrastructure Grants, around both  expenditure and non-financial performance. The Department had revised the way it set targets, and a dedicated strategic planning team was managing performance information, together with a monitoring and evaluation forum . The costs of transitioning municipalities in the wake of amalgamation was now estimate to be R277.7 million. In relation to forensic reports, the Department conceded that there was ongoing failure by many municipalities to executive recommendations in such reports, and some required further investigations, whilst others had already been referred to law enforcement agencies. In some cases there might be potential for asset forfeiture.

The Department then presented its post-audit Action Plan in respect of the discrepancies identified by the Auditor-General in the Municipal  Infrastructure Support Agency (MISA). The presentation took the form of a series of tables in which the overall progress  was summarised and categorised, and specifics were then given, broken down by findings, response, target dates and progress achieved. Most issues were already being addressed.

Members were appreciative of the presentations, particularly in regard to MISA, and were pleased to note that the recommendations of the Committee were being taken seriously. However, some Members questioned the conclusion that the section 22 determinations around transition had been unforeseeable, although the Deputy Minister explained the time frames and conceded that the determinations themselves could be anticipated but the amounts were not. Members pointed out that no mention had been made of this when presenting the budget in March. Members wanted to know how far the Department was with reaching agreement with National Treasury on funding the shortfalls, and asked for progress reports on any criminal proceedings, as also clarity on the reference to actions having prescribed. They pointed out that better compliance with the Public Finance Management Act and Treasury regulations must be displayed in future. Members wondered if annual figures from Statistics SA might not be a more reliable way to assess the equitable share, instead of population estimates, and questioned what was happening on the withholding of the share from other municipalities besides Renosterburg. They queries the outcomes of meetings with Eskom around payment disputes, noted that provincial government was lax in paying municipalities, and what was being done to recover debt owed to municipalities, and to ensure that councils would act on forensic reports. One Member pointed out that the report presented did not deal adequately with the lack of systems around appointments. Another noted that although a forensic report was supposed to be finalised in March, it had only been presented to the Committee last week, after prompting from the Committee, and asked the nature of the interactions between the Department and the National Prosecuting Authority and Special Investigating Unit. They also asked if all issues around the Municipal Demarcation Board had been covered in the report.

 

Meeting report

Department of Cooperative Governance (DCOG) progress reports
Implementation of recommendations in the Committee's Budgetary Review and Recommendations Report 2014 (BRRR)

Mr Vusi Madonsela, Director General, Department of Cooperative Governance, stated that the Department (or DCOG) had made significant progress towards implementing the recommendations made by the Portfolio Committee (the Committee) in the Budgetary Review and Recommendation Report (BRRR) of 2014.

The first recommendation made by the Committee related to the review of the method of determining the equitable shares for local governments. Mr Madonsela reported that the new equitable share formula was in the process of being implemented and would be updated every year to take into account changes in household numbers in each municipality as well as the cost of providing basic services.

The Department had been asked to outline the support it was providing to municipalities to prevent withholding or late transfers of the equitable share. To this end, Mr Madonsela stated that National Treasury and the South African Local Government Association (SALGA) had assisted most of the affected municipalities with concluding payment arrangements with Eskom and the Water Boards.

The Committee had also recommended that the Department create a mechanism to monitor the Municipal Infrastructure Grant (MIG) Unit. The Department had strengthened the MIG unit’s capacity to monitor expenditure and non-financial performance.

Another recommendation by the Committee was that the Department should ensure that its targets were specific, measurable, achievable, reliable and time-bound (SMART). To carry out this recommendation, the Minister had instructed that a strategic planning team be set up to manage performance information. Additionally, it had been decided that a monitoring and evaluation forum should be established to work with the strategic planning team.

The fifth recommendation was that the Department must outline the cost of transitioning of municipalities related to amalgamation. It was stated that the total costs were estimated at R431.4 million; but of this amount there was a shortfall of R292.4 million.

Finally, the Committee had requested a response on municipal forensic reports. The response was that there was ongoing failure by municipalities to execute recommendations in forensic reports. Some of the reports required further investigations to be made whereas others identified criminal malfeasance and as such, had been referred to law enforcement agencies. Furthermore, some of the reports showed that there was potential for asset forfeiture while other cases were being investigated by the DPCI.

Post audit Action Plan for the Municipal Infrastructure Support Agency (MISA)
Mr Muthotho Sigidi, Deputy Director General, DCOG presented the Department’s post audit action plan in respect of the findings on the Municipal Infrastructure Support Agency (MISA). The presentation took the form of a series of tables in which the progress, firstly, was summarised and categorised by markings of red, amber and green in respect of the progress. Percentage indicators were also provided.  For the majority of the findings made in the 2014 – 2015 audit report, measures to address the findings had either been already made or were under way. More details on each particular area identified are contained in the attached documentation. The areas covered payroll, expenditure management, fixed assets, predetermined objectives, performance management and supply chain management. Accounts receivable, commitments, accounts paid, trade, HR and use of consultants, cash, bank and expenses, and supply chain management were also covered. In each area, the tables set out the findings, the action plan, a date by which they should be addressed, and the progress to date.

Discussion
The Chairperson stated that the presentation contained very useful information and showed that the recommendations made previously by the Committee had been taken seriously.

Mr M Hlengwa (IFP) stated that he did not agree that that the section 22 determinations for transition were unforeseeable. He wanted to know at what stage was the engagement with National Treasury to fund the shortfall? He asked how the amount needed for the transitions was broken down into short, medium and long term needs. He too commended the post Audit Action Plan presentation as it showed that the Department had taken a positive approach to the Auditor-General’s report. The Committee would need progress reports on criminal proceedings against employees of the Department who were responsible for misspent funds. He commented that there had been been a general failure on the Department's part in compliance with National Treasury regulations and the Public Finance Management Act (PFMA). A better understanding of the way the Municipal Infrastructure Support Agency (MISA) operated was necessary.

Mr Andries Nel, Deputy Minister of Cooperative Governance, replied to the question on the foreseeability of the transitional grants by stating that the request to the Demarcation Board was initiated in December 2014 but the actual section 22 notices were issued in January 2015. The budget was tabled in the second or third week of February 2015. However, by this time budget requests to the National Treasury had been closed, in November 2014. He referred to the fact that an opposition parties had gone to court to contest the findings of the Municipal Demarcation Board (MDB), alleging that the MDB was acting under the Minister's influence. He said that although the fact of the expenses for transition grants may have been foreseeable, they were not quantifiable.

Mr Madonsela replied that the Department was aware it would not get any allocation from National Treasury in terms of the adjustment process, the only option was the allocation due in November. The Department was also engaging with its provincial counterparts to establish whether they could contribute to the costs of the transitional grants.

Mr K Mileham (DA) also commended the presentations. He asked about the status and effectiveness of MISA's internal audit function. He suggested the use of statistically valid figures such as those in StatsSA’s annual non-financial report of municipalities, that was presented to Parliament every September. He wondered if this should not be used as the basis for the equitable share formula, instead of the annual estimate of population in each municipality that was currently being used.

Mr Mileham noted that the presentation showed that Renosterburg municipality was the only one that had its share of equitable funding withheld from it, yet two other unnamed municipalities had the same problem of not signing an agreement with Eskom. He asked what was the timeframe that the Department had to resolve the issue of municipalities signing agreements with their creditors. He also asked what the outcomes of meetings with Eskom had been, to discuss the payments owed by municipalities.

He referred to the MIG narrative report and stated that it showed that a number of municipalities had not received transfers; for example Makana in the Eastern Cape and Thembelihle in the Northern Cape. He asked what was the reason for these municipalities not receiving their MIG funding. The forensic reports showed that a number of the incidents that had been identified therein had prescribed, and he asked if this was indeed correct and what was the reason for the slow progress? He asked what the Department was doing to make sure that councils acted on forensic reports.

Mr Mileham expressed the opinion that in fact the transitional grants were not unforeseeable. The Minister had initially issued the section 22 notice in December 2014, but when the budget was approved in February 2015 there had been no mention, at this time, of a shortfall. He asked how the same fixed amount could be allocated to each municipality for mergers and restructuring costs when there were such wide variations among municipalities in terms of population, geographical size and other factors. He also wanted to know what measures were being taken to recover the R4.3 billion debt owed to municipalities by provincial and national government, as this contributed to municipalities' inability to pay their creditors, which in turn led to municipalities having their equitable share allocation withheld.

Mr Madonsela replied that population sizes changed rapidly and since the StatsSA report was only made every five years, it would not be an appropriate basis for the equitable share formula. The Department did take into account general household surveys carried out by StatsSA between censuses. He stated that, to the best of his knowledge, criminal offences did not prescribe; but it was possible that the forensic report was referring to labour disputes. The Minister had written to the different MECs to follow up on the recommended remedial action in terms of the forensic reports. On the issue of the measures being taken to enforce debts owed to municipalities by other spheres of government, he said that there was a joint team with officials from the DCOG and from the national Department of Public Works to resolve disputes on invoices received from municipalities. There had been issues with some debtors claiming that incorrect invoices had been sent to them and the outcome had been that the amount owing to the Department had reduced significantly. The Department was working on making its website more user friendly so that various information, including MIG spending, would be more accessible.

Mr Sigidi responded to the issue of the calculation of the equitable share formula. He stated that this  formula was updated annually, on the basis of the change in numbers of households in a particular municipality and the cost in providing basic services. He did not have an answer to the Renosterburg question to hand. Officials from the Department had met with Eskom officials and failed to reach agreement on deadlines for payments and interest rates for sums owed. The Department had therefore decided to engage with the Department of Public Enterprises instead, and this was still in progress. The Director General of the National Treasury had written a demand to provincial and national governments to pay what they owed to municipalities. The Department also had a policy whereby any debtor querying an invoice had to pay 80% of the invoiced amount, despite the query, while investigations on the query were pending. Furthermore; although the report showed that over R4 billion was owed to municipalities by the other spheres of government, the bulk of these amounts (approximately R3 billion) were due in 90 days. He acknowledged that municipalities were often not complying with forensic reports. One option was to write to MECs so that they could carry out any necessary further investigations.

Another official from the Department acknowledged that there may be variations in the costs incurred by municipalities involved in amalgamations. However, the Department had considered it best to use an average for all the municipalities.

Another departmental official noted that MISA had an internal audit unit in existence that was functioning well. MISA also had an internal audit plan and its implementation was monitored by MISA's independent audit committee. He agreed that it was very important for MISA to put improved management systems into place. He made an example of improved control systems over trainees to ensure  that they were paid only while they were still employed by municipalities. 

Mr E Mthethwa (ANC) commended the presentations, especially with regards to MISA, but pointed out a number of issues that had not been adequately covered in the presentation. The Auditor-General’s report had discussed, among others, the lack of ‘systems’ in the Department, particularly in the appointment of artisans and temporary employees and emphasised a lack of leadership in this area. The issue of inappropriate and unqualified contractors being appointed should have been monitored in the report. He asked how many municipalities affected by withheld funds had still not obtained the funds and were in crisis, in terms of debts owed to Eskom. He pointed out that there was a discrepancy in the figures of the shortfall ,as the Department had stated that it was R277 million whereas the presentation mentioned R292.4 million.

Mr Madonsela responded that there had been an error in the initial calculation of the shortfall and the accurate figure was R277.2 million.

Mr B Bhanga (DA) stated that the Department had told the Committee in October 2014 that a report on a forensic audit would be finalised in March 2015, and then requested an extension in March until June. The Committee had only received the report after requesting it at a presentation made by the Department the previous week. He asked about the nature of the interactions between the Department and the National Prosecuting Authority (NPA). The report stated that the President had to make a promulgation regarding the Special Investigating Unit (SIU) and he wanted to know the progress with this. He raised a concern about the senior management of the Department not carrying out their monitoring function properly and about respecting the Committee’s oversight role. There was a need to publicise the Department’s efforts in fighting fraud and corruption.

Mr Madonsela stated that there had been engagement with the Anti-Corruption Task Team incorporating the NPA, the Hawks and other law enforcement agencies, to ensure that cases were investigated appropriately.  The outcome of the engagements was that forensic reports showed that there had been malfeasance, so the information would be placed before the NPA to allow it to decide whether to investigate further and/or prosecute. He clarified, in relation to the SIU, that in order to investigate anything, the SIU firstly needed to have a Presidential Proclamation that would authorise it to do so, and he was uncertain whether it was the Minister who would request the proclamation to be made, or whether it was the MEC or the relevant municipality.  

Mr Nel responded that there was not an adversarial relationship between the Committee and the Department and that the role of the Committee was appreciated. The Department had a zero tolerance approach to fraud and corruption and this was why the initiative had been taken to get all municipalities to compile forensic reports. He agreed that there was a need to communicate the Department's measures against fraud and corruption widely and effectively.

Mr Sigidi stated that these interactions with law enforcement agencies were continuing and existed at different levels; that is with the NPA, the Anti-Corruption Task Team and the Special Investigating Unit. He also pointed out that the Department had its own draft anti-corruption strategy.

Mr Hlengwa stated that he had not intended to cast aspersions on any official with his question about the transitional grants but wanted to point out that the timing of the section 22 had a negative effect on the Department's budgeting. Referring to the narrative report (item 2.5), he made a correction on one of the municipalities which were restructuring. In Limpopo, and asked if the events earlier in the year around the MDB had been captured in the report. He stated that it was important that municipalities be respected by people owing them money for services; especially as municipalities would suffer by having funds withheld if they did not pay their creditors. Provincial government was particularly problematic in defaulting on debts owed to municipalities.

Mr Nel agreed that there was a general culture of non-payment of debts owed to municipalities, even in the private sector, and that this attitude had to change if municipalities were to function effectively. Studies by the Department did not show that there was always necessarily a strong correlation between municipalities owed money by other spheres of government on one hand and those owing money to Eskom and water boards on the other.

Mr Mileham stated that he had not been referring to StatsSA’s census conducted at five year intervals as a basis for calculating the equitable sharing formula, but to an annual report published by StatsSA. He remained of the opinion that the transitional grants were foreseeable.

Mr Sigidi responded that the Department would engage with the National Treasury and StatsSA.

Mr Bhanga stated that more accountability was needed for implementation of forensic reports by municipalities.

The meeting was adjourned.
 

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