Local Government Audit Outcomes 2015/16: Auditor-General SA briefing

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Cooperative Governance and Traditional Affairs

28 June 2017
Chairperson: Mr M Mdakane (ANC)
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Meeting Summary

Auditor-General South Africa gave a briefing on the Local Government Audit Outcomes. It said that as part of continual improvement it was focusing on improving accountability to improve audit outcomes. This would demand better planning, internal controls, monitoring and consequence management. The overall MFMA outcomes of 263 municipalities were looked at in terms of:
• Financial health
• Annual performance reports
• Human resource management
• Use of consultants
• Assurance providers
• Audit outcomes emerging risks
• Internal control
• Irregular expenditure and supply chain management
• Fraud and consequences
• Unauthorised expenditure
• Root causes.

The total budget for municipalities was R365b. Root causes for poor performance were:
• slow response to improving key controls and addressing risk areas which applied to 86% of municipalities;
• inadequate consequences for poor performance and transgressions which applied to 73% of municipalities;
• instability or vacancies in key positions which applied to 73% of municipalities.

This was followed by a look at provincial outcomes for municipalities. The presentation looked at irregular expenditure for municipalities over a three-year period. The five highest contributors responsible for 31% of the irregular expenditure were: OR Tambo District (EC); Nelson Mandela Bay Metro (EC); Ngaka Modiri Molema District (NW); Mbombela (MP); and City of Tshwane Metro (GP). The financial viability of municipalities was on a steady decline.

The presentation also looked at Water and Sanitation grant funding and performance reporting and the AG had tabled a Performance Audit Report on Water Infrastructure on 30 November 2016. Of the findings, one was that 20% of the projects in progress did not address the cause of the water backlog reported. In terms of the maintenance of water infrastructure at 148 municipalities, 56% had no policy on maintenance of water infrastructure and 45% had no maintenance plan while 24% did not budget for maintenance. 18% of the sanitation infrastructure projects at 150 municipalities did not address the cause of the sanitation backlog reported. Only 15 municipalities did not use Municipal Infrastructure Grant (MIG) grants in line with the grants framework and only 7% of the R15.04 billion in grants was not spent.

The emerging risks were that the Municipal Standard Chart of Accounts (mSCOA) would be implemented from 1 July 2017; the use of the Central Supplier Database (CSD) and the eTender portal was compulsory from 1 July 2016 yet the supply chain management policy at 139 municipalities was not updated to invite quotations from suppliers registered on the CSD while 118 municipalities still used their own database of prospective suppliers that was not synchronised with the CSD; and the contracts of municipal managers and senior management (including CFOs) were ending in 2016/17.

Members wanted a breakdown of Fruitless and Wasteful Expenditure because it was a breach of the Municipal Finance Management Act and asked why it was not part of the report. Members were worried that there was no improvement. What could Parliament do if some municipalities went beyond MIG prescripts or returned MIG monies? Members asked AGSA to give details for each municipality, especially on management issues, so that the Committee could identify why there was poor performance.

Members said little information was made available about corruption in municipalities. AGSA must say which municipalities and entities or institutions in the country were corrupt. This would force a focus on them and then a pilot intervention could be done.

Members suggested looking beyond the municipalities for reasons for the lack of functionality. Provinces were stifling efforts and the recommendations of the AG. Members gave the example of Sekhukhune and Elias Motsoaledi municipalities where there was supposed to be an investigation following from the audit report where R60m was unaccounted for. The investigation had lasted less than a week because the municipalities had received a letter from the province stating that the investigation was cancelled as the project had been endorsed by the district municipality. Members suggested that there was conniving to loot with the ‘powers that be’, the political heads and the administration.

Members said one could not expect good performance from municipalities if there was no CFO to focus on financial affairs. The example was given of the PRASA board chairperson who had made a case against the Hawks to compel them to do their job. In cases where there was no investigation or no outcomes, the Committee had to compel agencies to do their job, even via the route of going to court so that there could be consequences. Members noted that Modiri Molema municipality was another example of a municipality not performing because of corruption and maladministration. Even with a new administration, the municipality was regressing. The NCOP had resolved to put a KZN municipality into administration. Was this state of affairs due to political influence of the municipal management and the mayors? What, as Parliament, could be done regarding the matter? Members said the recycling of municipal personnel was another challenge, where people who had been charged with corruption merely moved to a different municipality.

On accountability and internal controls, Members asked why municipalities were outsourcing the compilation of the financial statements. Members asked what AGSA had in mind when it said it was looking to increase its teeth. They asked why there was nothing in the report on the recovery of Unauthorised, Irregular and Fruitless and Wasteful Expenditure. Did the AG investigate to see if funds were recovered? Members agreed that AGSA should not hold back on raising critical questions and consequences. Members welcomed the extra teeth for the AG and said they should go beyond that and emulate PRASA, which had taken the Hawks to court because the Hawks were not investigating what they were supposed to.
 

Meeting report

Local Government Audit Outcomes 2015/16: Auditor-General SA briefing
Ms Corne Myburgh, AGSA Executive, said the AGSA mandate was to strengthen democracy by enabling oversight, accountability and good governance in the public sector through auditing. As part of continual improvement it was focusing on improving accountability to improve audit outcomes. This would demand better planning, internal controls, monitoring and consequence management.

She said the percentages used in the presentation were calculated based on the completed audits of 263 municipalities. Overall MFMA outcomes were looked at in terms of:
• Financial health
• Annual performance reports
• Human resource management
• Use of consultants
• Assurance providers
• Audit outcomes emerging risks
• Internal control
• Irregular expenditure and supply chain management
• Fraud and consequences
• Unauthorised expenditure
• Root causes.

The total budget for municipalities was R365b. Root causes for poor performance were:
• slow response to improving key controls and addressing risk areas which applied to 86% of municipalities;
• inadequate consequences for poor performance and transgressions which applied to 73% of municipalities;
• instability or vacancies in key positions which applied to 73% of municipalities.

This was followed by a look at provincial outcomes for municipalities. The presentation looked at irregular expenditure for municipalities over a three-year period. The five highest contributors responsible for 31% of the irregular expenditure were: OR Tambo District (EC); Nelson Mandela Bay Metro (EC); Ngaka Modiri Molema District (NW); Mbombela (MP); and City of Tshwane Metro (GP). The financial viability of municipalities was on a steady decline.

The presentation also looked at Water and Sanitation grant funding and performance reporting and the AG had tabled a Performance Audit Report on Water Infrastructure on 30 November 2016. Of the findings, one was that 20% of the projects in progress did not address the cause of the water backlog reported. In terms of the maintenance of water infrastructure at 148 municipalities, 56% had no policy on maintenance of water infrastructure and 45% had no maintenance plan while 24% did not budget for maintenance. 18% of the sanitation infrastructure projects at 150 municipalities did not address the cause of the sanitation backlog reported. Only 15 municipalities did not use Municipal Infrastructure Grant (MIG) grants in line with the grants framework and only 7% of the R15.04 billion in grants was not spent.

In terms of Human Resource Management, 27% of municipalities were rated as good, while 47% were rated as requiring intervention.

The emerging risks were that the Municipal Standard Chart of Accounts (mSCOA) would be implemented from 1 July 2017; the use of the Central Supplier Database (CSD) and the eTender portal was compulsory from 1 July 2016 yet the supply chain management (SCM) policy at 139 municipalities was not updated to invite quotations from suppliers registered on the CSD while 118 municipalities still used their own database of prospective suppliers that was not synchronised with the CSD; and the contracts of municipal managers and senior management (including CFOs) were ending in 2016/17.

Ms Myburgh quoted Robert Kilgaard’s equation that Corruption = Monopoly + Discretion + Accountability and said that AGSA’s focus was on increasing accountability which would lead to a decrease in corruption.

Discussion
Mr K Mileham (DA) said he did not agree that corruption arose only from monopolies. He had previously asked why a breakdown of Fruitless and Wasteful Expenditure was not provided because it was a breach of the Municipal Finance Management Act (MFMA) and why was it not part of the report.

Ms B Maluleke (ANC) said she was worried that there was no improvement, with some provinces not having even one clean audit. What could Parliament or the Committee do if some municipalities went beyond MIG prescripts or returned MIG monies?

Mr E Mthethwa (ANC) said that all municipalities except the Western Cape ones were on the outer edge of the diagrams on pp14-23. AGSA should give details for each municipality, especially management issues, so that the Committee could identify why there was poor performance.

Mr A Masondo (ANC) said little information was made available on corruption. AGSA must say which municipalities and entities or institutions in the country were corrupt. This would force a focus on them and then a pilot intervention could be done. His view was that best practice had to be identified.

Mr C Matsepe (DA) said it was disappointing to hear the lamenting about the functionality of municipalities every year. One needed to look for reasons for their lack of functionality outside of the municipalities. He said provinces were stifling efforts and the recommendations of the AGSA. He gave the example of Sekhukhune District and Elias Motsoaledi Local municipalities where there was supposed to be an investigation following on from the audit report where R60m was unaccounted for. The investigation had lasted less than a week because the municipalities had received a letter from the province stating that the investigation was cancelled because the project had been endorsed by the district municipality. He asked whether district municipalities were babysitting local municipalities. He said that there was conniving to loot with the ‘powers that be’, the political heads and the administration.

Mr J Dube (ANC) asked what the total budget of the Eastern Cape was. He asked if the AG could give a report on irregular expenditure, which included municipalities where allegations were not investigated. No one could expect good performance from municipalities if there was no CFO to focus on financial affairs.

Mr Masondo said the PRASA board chairperson had made a case against the Hawks to compel them to do their job. In cases where there was no investigation or no outcomes, the Committee had to compel entities to do their job, even via the route of going to court so that there could be consequences.
 
Ms T Mokwele (EFF, North West) said that Modiri Molema municipality was another example of a municipality not performing because of corruption and maladministration. Even with a new administration, the municipality was regressing. She noted that the NCOP had resolved to put a KZN municipality into administration. Was this state of affairs due to the political influence of the municipal management and the mayors? What, as Parliament, could be done about this? The recycling of municipal personnel was another challenge, where people who had been charged with corruption merely moved to a different municipality.

On accountability and internal controls, Ms T Wana (ANC, NCOP Eastern Cape) said there should be levels of approval. She wanted frameworks to analyse where loopholes for taking the state’s money were. There was a lack of patriotism at municipal level. She asked how it could be correct that municipalities were outsourcing the drawing up of the financial statements.

Ms Myburgh replied that the corruption formula used in the presentation was not from the AGSA but from Robert Kilgaard. She said the AG’s message was not a focus on corruption but rather on accountability and of processes not being followed. The AG identified contracts and could recommend an investigation but could not say that there was corruption.

She said the Fruitless and Wasteful Expenditure figure was much less than the Unauthorised and Irregular Expenditure figures.

She would supply the information that had been requested in writing, but she could not provide the management letters without municipal management permission to release the letter.

Mr Mileham said Parliament had the right to request any document or report.

Mr Mthethwa said the release of the management letters was especially important in the case of problem municipalities so that the Committee could pick up what was not being addressed by management and could therefore take an informed decision.

Mr Matsepe said he had been a councillor for 13 years and had never laid eyes on a management letter from the Auditor General.

The Chairperson said the municipalities could be asked to appear before the Committee, this would not put pressure on the AG for the management letter. This course of action had to be considered

Ms Myburgh agreed and said that it was better to get the letter from the auditees themselves.

Regarding investigations, she said the AGSA was looking at increasing their powers via the Public Auditing Act so that if the AG gave a recommendation it was the equivalent of being compulsory and that the municipalities could not say who would do the investigation. It had to be an independent body.

The AG was doing a lot of follow up work with South African Local Government Association (SALGA). She would check with SALGA on their plans.

Mr Mzizi Mavundla, AGSA Senior Manager, said one needed to look at areas of influence within municipalities and how municipalities were structured. The Municipal Council had a Municipal Public Accounts Committee which was the equivalent of the Standing Committee on Public Accounts (SCOPA). When the municipal audit report was presented and investigations needed to be done, MPAC’s role was to deal with all Unauthorised and Irregular Expenditure and Fruitless and Wasteful Expenditure cases. Some structures were not doing what they should be doing. He also referred to people not planning correctly.

On why some municipalities had moved to a clean audit and then regressed, he said there were instances where SCM issues were not enough to go into the audit report. Municipalities were failing to institutionalise basic controls and this resulted in money being paid in a hurry and therefore paying more for goods and services. On the MIG grant, he said it was the same case of no planning taking place. He said Unauthorised Expenditure arose from a lack of institutional internal controls as well as no re-prioritising taking place. In some provinces, it was because the province experienced a lack of capacity.

Ms Wana asked what the link between the internal auditors and the AG was because corruption was a line function issue and operational matters needed to be investigated.

Mr Mileham said that that was not the AG’s function, rather it was the Department’s function. On the MPAC role, he asked if this was part of the AG’s functions or of SALGA. The AG had said that it was looking to increasing its teeth. What exactly did they have in mind because they had to ensure that there were consequences for maladministration? He saw nothing about the recovery of funds in the report on Unauthorised, Irregular Expenditure and Fruitless and Wasteful Expenditure. Did the AG investigate to see if funds were recovered?

Ms Myburgh replied they could only recommend to management, they could not enforce these recommendations. The extra teeth they were looking for was the ability to take a case to the Hawks.

Mr Mavundla replied that the AG was doing a Status of Records which would advise municipalities that they were going off course.

Regarding MPAC, he said the AG had done extensive training in collaboration with COGTA and SALGA even though this was not part of the AG mandate.
 
On the recovery of funds for Unauthorised, Irregular Expenditure and Fruitless and Wasteful Expenditure, Ms Myburgh said that 89% of cases had not been done. R6m had been recovered.

Mr Masondo said that the AG should not hold back on raising critical questions and consequences. He welcomed the extra teeth for the AG and said they should go beyond that and emulate PRASA, which had taken the Hawks to court because the Hawks were not investigating what they were supposed to.

On the assistance given to COGTA and SALGA, Ms Myburgh said that the AG training was high level training and not qualifications training. She said that when consultants were used, the consultants should be transferring their skills.

The Chairperson noted the budget for municipalities was a huge R365b.

Ms Wana wanted to know about the interventions in Great Kei and Mbizana municipalities.

Mr Mavundla replied that the intervention stemmed from the audited outcomes in order to move the municipalities to an acceptable audit status.

The meeting was adjourned
 

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