Minister on municipalities affected by VBS Bank collapse

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Cooperative Governance and Traditional Affairs

23 October 2018
Chairperson: Mr M Mdakane (ANC)
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Meeting Summary

The COGTA Minister gave a highly anticipated briefing on reports that municipalities in Limpopo, Gauteng and the North West province had lost huge sums of money invested in the now infamous VBS Mutual Bank.

The briefing detailed steps taken by the Department in the wake of the collapse and curatorship of VBS and revelations that poor municipalities had lost money in the scheme. The steps included meetings held with the affected municipalities as well as with National Treasury, the Department of Cooperative Governance (COGTA) and Auditor General South Africa to discuss the impact of the potential investment loss. Subsequently, Treasury issued a communique to the affected municipalities calling for a consistent approach in their restructuring of budgets, disclosure of potential investment loss in their annual financial statements and consequence management. Provincial departments had already instituted forensic investigations in the municipalities in accordance with section 106 of Municipal Systems Act and these were still in progress.

The Minister announced that his Office had consulted state legal opinion on the possibility of launching a lawsuit to recover the lost funds. The process was still in its early stages, but he was convinced that this was the correct approach in the matter. Also of interest was the Minister’s assertion that no bailout of municipalities was in the offing. Rather, technical support would be provided to strengthen internal controls, reporting, revenue raising methods, and other key areas.

Members discussed the subject of financial recovery plans, as well as the onus placed by legislation on the Department to impose such plans. This was accompanied by the question why the Minister, as legally obliged to do so, had not intervened to dissolve the municipal councils which had lost money to VBS - when Provincial Departments had failed to discharge the obligation placed on them by the law. The subject of a Section 139 intervention took up most of the discussion in the meeting. This also led to sharp exchanges between the Minister and the Democratic Alliance whom the Minister accused of politicking and grandstanding. The DA wanted to know why municipal officials implicated in the Reserve Bank report on VBS were still on the job after all this time. Why were there no consequences for these people who were still in control of public finance.

An alternative view was that instead of putting these municipalities under Section 139 intervention, the Department should apply Section 124 and assist those unable to maintain themselves due to being located in poor rural areas and therefore not in a position to raise adequate revenues.

Also part of the discussion were the academic qualifications of the CFOs and Municipal Managers of these municipalities. Their qualifications showed they were learned people and their illegal conduct could not be excused on the grounds of ignorance or professional incompetence. It was suggested that the use of outside legal opinion by some municipal officials to justify contravening the law constituted an attack on the government itself. The meeting was in full agreement that the MFMA should have been the only legal guide in the VBS matter and any outside legal opinion was irrelevant. Given the obvious illegality of the venture, Members asked how it was possible for municipal councils to have approved these investments. Members were generally sympathetic to the Minister’s plea for patience with the ongoing forensic investigation before the police acted. They urged the Department to pursue all avenues to recover, if not all, then as much of the money as was possible.

Meeting report

Opening remarks
The Chairperson welcomed Minister Zweli Mkhize and his delegation and said everyone was eager to hear what the current situation was on the VBS Mutual Bank matter, which had become the cause of great contention in the public arena. He hoped the Minister would be able to bring much needed clarity and perspective on the matter and thus serve to assist the Committee going forward.
Minister’s presentation on municipalities affected by VBS Bank collapse
COGTA Minister, Zweli Mkhize, highlighted the following:
- 14 municipalities located in three Provinces - Gauteng, Limpopo and North West - had illegally invested and subsequently lost funds with VBS Mutual Bank, to the total tune of R1 576 938 563 (see document)
- The impact of the loss of funds on service delivery had already begun to make itself felt in various ways including suspended infrastructure projects, inability to pay ESKOM for electricity; inability to pay for water and sanitation; imminent disruption of refuse collection, inability to pay supplier invoices within thirty days. These challenges would persist in the short to medium term.

It was anticipated that the loss of funds in VBS could also trigger the following:
- potential litigation on the failure to pay service providers and inability to honour legal/ contractual obligations
- non-payment of monthly fixed operational expenditure such as salaries and other statutory costs
- fruitless and wasteful expenditure due to interest on overdue accounts
- community protests and industrial action
- in municipalities that had invested conditional grants, and where unspent conditional grant funds were not cash backed, the application for the roll-over of unspent conditional grants may not be approved
- the high risk of financial unsustainability.

A number of steps had been taken to address the situation:
- A Ministerial meeting with the affected municipalities was held on 19 June 2018; resolutions taken included budget restructuring, development of recovery plans to ensure that municipalities remained financially stable and continued to provide sustainable service delivery

- National Treasury, the Department of Cooperative Governance (DCOG) and the Office of the Auditor General (AGSA) held a meeting on 03 July 2018 to discuss the impact of potential investment loss.

- Subsequently, Treasury had issued a communique to the affected municipalities calling for a consistent approach in the restructuring of budgets, the disclosure of potential investment loss in the annual financial statements, and consequence management

- Municipalities were instructed to submit monthly budget statements to the mayor and relevant Treasury in accordance with Section 71 of the MFMA.

- Chief Financial Officers and Municipal Managers were required to sign quarterly Section 71 verification reports for accuracy and completeness of information prior to publication by National Treasury.

- The signed information should consist of the in-year financial results and financial performance information relating to municipal conditional grants.

- Provincial Treasuries should verify consistent reporting of Section 71 reports.

Minister Mkhize announced that his Office had consulted state legal opinion on the possibility of launching a lawsuit to recover the money. This process was still in its early stages and therefore a firm report on the subject was not available. Nevertheless, it was the Department’s intention to proceed in that direction. He was convinced that the lawsuit, together with the ongoing forensic investigation, would be the best way to recover public funds and to take disciplinary action against those involved, and where appropriate, lay criminal charges.

The Provincial Departments had already instituted forensic investigations in these municipalities in accordance with section 106 of Municipal Systems Act and the investigations are still in progress:

- Limpopo Province had held an introductory meeting with the affected municipalities on 28 August 2018 and the investigation was expected to be over within three months.
- North West Province had commenced its investigation in July 2018 and the investigation report was finalised on 18 October 2018
- COGTA was still awaiting confirmation from Gauteng Province on its investigation timeline.

Minister Mkhize noted that in addition to defrauding municipalities, the collapse of VBS had resulted in the loss of funds invested by local funeral schemes and other community investment schemes by the poor. The Minister said there should be an effort to assist those schemes to recover the monies lost.

The Minister made these recommendations about municipalities implicated in the VBS saga:
- To improve financial sustainability, municipalities need to implement recovery plans as well as strategies to strengthen governance structures
- Risks associated with the inadequate implementation of recovery plans and strategies needed to be monitored by National Treasury through its provincial branches, and must be well managed to realize the expected outcomes
- The Back to Basics programme, which sought to address municipal performance failures, must be used to assist the affected municipalities in providing quality and sustainable service delivery.

Minister Mkhize said there would be no bailouts to the municipalities affected. However, support would be provided to strengthen internal controls, reporting, revenue raising measures, capacity building and service delivery.

In closing, the Minister said the VBS matter was “work in progress” and a lot of questions on the subject were still unanswered. He was aware that Committee members had lots of questions on the matter, but he did not expect to be able to answer all of them.

Mr K Mileham (DA) asked why Dr JS Moroka Municipality, which had been one of those mentioned in an earlier National Treasury report as having invested R10.118 million in VBS, was not part of the list presented by the Minister. He was concerned that the Minister ‘s focus on the VBS matter seemed to be on Municipal Investment Regulations, as the main basis for the illegality. He pointed out Section 7(3)(b) of the Municipal Finance Management Act (MFMA) was explicit in its instruction that "a municipality may not open a bank account with an institution not registered as a bank in terms of the Banks Act". He was aware that some municipalities had challenged the Municipal Investment Regulations, but the MFMA, as national legislation, was quite clear that municipalities may not deposit funds in a mutual bank.

Mr Mileham was concerned at the number of municipalities on the Minister’s list which had not implemented financial recovery plans. Section 139 (1) of the MFMA placed an onus on the provincial executive to impose financial recovery plans, while Section 146 of the same act specified what should happen if this was not done. The latter was also borne out by Section 139 (5) of the Constitution which authorised the Minister to dissolve a municipal council should it not have implemented a financial recovery plan or be incapable of doing so. Therefore the question was: why had these municipal councils not been dissolved? Why had the financial recovery plans not been imposed?

Mr Mileham said all 14 of the municipal councils on the Minister’s list were part of the 87 distressed or dysfunctional municipalities in the country. These municipalities had financial and service delivery challenges, such as not being able to pay electricity bills and other creditors’ accounts, yet they were allowed to continue incurring further costs, to operate “with impunity”, and to get away with challenging regulations. He asked why Ms Florence Radzilani was allowed “to go on national television” and deny knowledge of those regulations despite being the Executive Mayor of Vhembe District Municipality. And why were municipal managers who had acted in contravention of the regulations and the law, still permitted “to sit in their cushy positions, earning a fat salary?" He asked how many of the councils on the Minister’s list were under administration.

Mr Mileham noted that Mr Romeo Mohaudi of West Rand Municipality had asserted that his decision to deposit funds with VBS was legal. The man was “known” to have very close links to VBS Bank. Why was he not suspended? These were the questions being asked by poor communities on the ground and the Minister should answer them.

Mr E Mthethwa (ANC) wanted to know the fate of the R60 million overpaid to the Mahikeng municipality. Was the money still in the municipal coffers or had it also been invested in VBS bank? He could not understand the logic behind the municipal manager’s claim that keeping the money was “costly” since the expectation was that funds sitting in a bank account normally generated interest. He proposed that the educational qualifications of all municipal managers in the Minister’s list be scrutinised.

Mr Mthethwa asked for clarity on what appeared to be a contradiction with Vhembe District Municipality, which had invested a large amount of money in VBS Bank. On the one hand, Vhembe claimed to be doing well while on the other it was clear that the municipality was owing on its water and electricity bills and was also failing to pay service providers within the stipulated 30 days.

Responding to Mr Mthethwa, the Minister replied that the information on Vhembe had come from the municipality’s own officials and as such could not be relied on. The only way to verify it was through a COGTA-initiated independent forensic audit, the outcome of which would be well researched and scientifically verified data able to stand any scrutiny, even in court. On academic qualifications, the Minister read out the qualifications of all the Chief Financial Officers and Municipal Managers implicated. The list showed that the overwhelming majority had the relevant qualifications for the job.

On Mahikeng, the Minister said the Municipal Manager’s behaviour was “unbecoming” and the Minister had told the MEC in the province to deal with him. The Minister said the person had indeed been dealt with. On the overpaid R60 million invested with VBS, National Treasury had decided that the amount would be deducted from Mahikeng’s next equitable share allocation.

Responding to Mr Mileham, the Minister asked him to accept that the VBS saga involved a lot of wrongdoing, but also that the Department had already covered some ground towards addressing it. A lot of questions remained unanswered but an investigation was well under way to get to the bottom of the matter. The Minister reminded him that the Constitution prevented central government from unduly interfering in the ordinary functioning of municipalities, including the suspension or firing of municipal officials.
The Minister said the Dr JS Moroka municipality was not on his list because it had managed to recover its investment in VBS before the bank was put into curatorship. This did not absolve the municipality from having invested illegally in the Bank, and this would be dealt with as the investigation unfolds. On financial recovery plans, he pointed out that it was COGTA that had demanded council reports on the matter. Even after the councils had submitted the reports, the Department had gone back to them to point out the deficiencies in those reports, including sending COGTA officials to physically engage with municipalities to ensure that effective recovery plans were in place.

Minister Mkhize said the number of municipalities under central government intervention was “large”. He said the South African Local Government Association (SALGA), as well as the National Council of Provinces (NCOP) had expressed concern that perhaps the Department was “rushing too quickly” to impose Section 139 on municipalities. Currently 24 municipalities were under section 139 intervention, with Kwazulu Natal and the North West having the highest number. Although it was not the Department’s wish to run municipalities, it was keeping a close watch on these municipalities and where appropriate, further escalation of intervention would be made.

Replying to the question on Ms Radzilani's appearance on national television, the Minister said enquiries had been made and seemingly no one “knew about it”. However, he assured Members that the forensic investigation report would also deal with that matter. The same applied to Mr Mohaudi’s alleged connections with VBS Bank. On the West Rand municipal manager’s assertion about the legality of investing with VBS, the Minister had requested documentary proof of the legal opinion behind this assertion. However, he was firm in his position that any legal opinion outside of the MFMA was irrelevant.

The Minister urged patience and said although the process was tedious and upsetting, he was convinced that all the right steps were being taken to address the situation. Members should give the process time to run its course to ensure that in the end, the outcome could not be challenged, even in a court of law. By that time, the Department will be in a good position to say “who did what”, and this would result in more effective ways of recovering what was lost. Even more effective would be to combine the Department’s investigation with that of the Reserve Bank as that would provide the whole chain of financial transactions necessary to prove a strong case of fraud and collusion between municipalities and VBS.

Mr X Ngwezi (ANC) was worried about the overpayment of R60 million to a municipality. What had happened to the person responsible for the overpayment? He was not convinced that the payment had been an innocent mistake. He cited a similar case in KwaZulu Natal where an official had made overpayments to councillors to lend credence to the claim that there had been a system error, when in fact it was disguising the intentional and fraudulent overpayment of a supplier.

He urged the Minister to ensure that whatever could be recovered from the VBS fiasco, whether in cash or kind, should be pursued at all costs. He expressed concern about the municipalities’ failure to pay invoices within the stipulated 30 day period. This was against the law and the Department should do something about it. He cited three municipalities which he recommended should be put under administration as soon as possible. These were West Rand, Dr Ruth Sekgomotsi Mompati and Fetakgomo-Tubatse municipalities. His view was that the three were in a particularly dire situation.

Mr Ngwezi said that by using outside legal opinion to justify contravening the law, government officials in the VBS matter had “attacked” government itself. The law should have been enforced and officials should have simply abided by it. He commended those municipalities such as Giyani, Mahikeng and Madibeng which had already taken disciplinary measures against some of its officials. However, he questioned how the councils could have approved the investments in the first place without having competently applied themselves to the matter.

Ms N Shabalala (ANC) said the Minister’s report was “a job well done" but urged that more should be done to interrogate the recovery plans put in place by municipalities. She noted that some of the funds invested in VBS by municipalities had been taken from the municipal conditional grants. This was not a surplus, but funds already allocated for specific projects. How could this be used as investment? She welcomed the forensic audit as it would enable the Department to find out who had actually been involved and how. She agreed with the Minister that government should consider the plight of the poor "stokvel mamas” who had lost money in the VBS swindle.

Mr N Khubisa (NFP) commended the Minister on the report, as the VBS had attracted quite significant public interest. The report showed that the Minister had already done some work on the matter and the overall impression was that this was a work in progress.

On the academic qualifications of the CFOs and municipal managers, Mr Khubisa said that these were learned people whose illegal conduct could not be excused on the grounds of ignorance or professional incompetence. He urged the Minister to work with other Departments on the matter to ensure that maximum pressure was brought to bear on municipalities to prevent this ever happening again.

Mr J Dube (ANC) suggested that instead of putting municipalities under a Section 139 intervention of the Constitution, the Department should look at section 154, which aimed at assisting municipalities unable to maintain themselves due to being in poor rural areas and therefore not in a position to raise enough revenue. He urged patience on the Department’s forensic investigation on the VBS matter. He requested that the Minister take concrete action in filling key vacancies reported by various local governments around the country, as empty posts led to municipal under-performance, especially in financial administration.

Mr Mileham said the Minister had not replied to his question about which of the 14 municipalities implicated in VBS were under administration. Mr Mileham said Section 139(5) and (7) of the Constitution was “very clear” and to remind the Minister and members, he read it verbatim:
"139(5) If a municipality, as a result of a crisis in its financial affairs, is in serious or persistent material breach of its obligations to provide basic services or to meet its financial commitments, or admits that it is unable to meet its obligations or financial commitments, the relevant provincial executive must—
(a) impose a recovery plan aimed at securing the municipality’s ability to meet its obligations to provide basic services or its financial commitments, which—
(i) is to be prepared in accordance with national legislation; and
(ii) binds the municipality in the exercise of its legislative and executive authority, but only to the extent necessary to solve the crisis in its financial affairs; and
(b) dissolve the Municipal Council, if the municipality cannot or does not approve legislative measures, including a budget or any revenue-raising measures, necessary to give effect to the recovery plan, and—
(i) appoint an administrator until a newly elected Municipal Council has been declared elected; and
(ii) approve a temporary budget or revenue-raising measures or any other measures giving effect to the recovery plan to provide for the continued functioning of the municipality; or
(c) if the Municipal Council is not dissolved in terms of paragraph (b), assume responsibility for the implementation of the recovery plan to the extent that the municipality cannot or does not otherwise implement the recovery plan."
(7) If a provincial executive cannot or does not or does not adequately exercise the powers or perform the functions referred to in subsection (4) or (5), the national executive must intervene in terms of subsection (4) or (5) in the stead of the relevant provincial executive".

Mr Mileham argued that Section 154 as suggested by Mr Dube was all well and good, but there came a point where one had to say that the assistance envisaged by Section 154 was “not working”, where a local council was in persistent breach of its service delivery obligations. According to Mr Mileham, “That point is now”. That point had been reached when municipalities could not withdraw monies invested in VBS Bank. Since provincial government had failed to act at that point, it had fallen to the Minister to take action in terms of the Constitution. Mr Mileham therefore asked: Why had the Minister not acted? The section clearly imposed an obligation: it said “must”, and not “may”.

Mr Mileham said it was fine to say action was being taken “over here and over there”, but the main issue was to take firm action. That was why the DA had been calling for the Integrated Support and Intervention Monitoring Bill since 2014. The Bill had still not come before the Committee. Why?

The Minister replied that the Bill was still being debated between COGTA and the Department of Public Service and Administration (DPSA). Parts of that Bill touched on the sphere of the Department of Planning, Monitoring and Evaluation (DPME) and therefore a big part of the discussion was about which Department should take responsibility for the Bill.

On the subject of intervention, the Minister said when he assumed office, he had specified the conditions under which he would intervene in municipalities. One of those conditions was that the Department must demonstrate that in line with Section 154, adequate support to the municipality had been given. This was currently what the Department was in the process of ensuring. In recent weeks the Department had signed memoranda of understanding with Treasury to enable COGTA officials to go into the troubled municipalities. The Department had issued calls for technical assistance to address the matter. This was part of the build-up to implementing Section 139.

The Minister said there was currently a debate around when and where to appoint an Administrator as part of the implementation of Section 139, as the different subsections specify different forms of intervention. This did not mean that an intervention will not happen, but only that a proper case should be made first, so as to avoid legal challenges. Also, it was not ideal to increase the number of interventions given the already large number of municipalities under administration. The Department could not prove that its Provincial Departments were either unwilling; inadequately addressing; or failing to discharge the duty to intervene. Bypassing the Provincial Departments therefore was not possible at the moment. The forensic audit report would be the best way to decide the question.

The Minister reminded the Committee that running the municipalities under administration was a costly exercise, and this applied to the provision of section 154 support as well. The Department “did not fear intervention” but wanted to ensure that it was done as a last resort.

The Minister indicated that of the municipalities implicated in the VBS Bank saga, Mahikeng, Naledi and Ngaka Modiri Molema in the North West were under administration. In response to Mr Dube, he agreed that there must be proof of assistance followed by failure, before intervention could occur. To underscore the point about patience, the Minister cited as an example the lack of progress in the VBS “political” case opened by the DA in North West. He said the case was going nowhere because the evidence could only be provided by COGTA and/or the Reserve Bank. For the police to investigate, the forensic audit reports first had to come out. He said while the DA was merely “politicking and grandstanding” on the matter, the Department was busy coming up with the substantive information on which real progress on the VBS matter could be measured.

On vacancies, the Minister agreed that more work needed to be done to intervene in municipalities with poor skills. He agreed with Mr Khubisa that the CFOs and municipal managers involved in the VBS municipalities knew exactly what they were doing. He assured Ms Shabalala that the Department was keen to get to the bottom of why conditional grant funding had been invested.

On how councils could approve these investments without interrogating Treasury regulations, the Minister told of a meeting attended by Minister Nkosazana Dlamini-Zuma and himself where the question was asked: did the council know about these investments? The mayor concerned denied any knowledge of the matter. When the municipal manager was asked the question, he said when the decision was made, he was aware of it but he was not the municipal manager then but the CFO. On further questioning, he added that at the time, his appointment as CFO was still pending and therefore he was not allowed to sign any documents. Eventually no one could say who gave the go ahead for the investment. These were the kinds of convoluted stories the forensic investigation would probe.

The Minister replied to Mr Ngwezi that he had also asked about the person responsible for the R60 million overpayment. The department in question had explained this away as an administrative error. The view was that the incident did not show deliberate or malicious intent on the official’s part.

Mr Mthethwa remarked that he hoped the forensic investigations were not being carried out by KPMG, since one could not trust the company these days. He asked the Minister if COGTA had satisfied itself that the funds lost in the VBS matter had not already fled the country.

Mr Mileham said it was not for the Minister to decide whether the police had the capacity to investigate or not. Municipal money had disappeared and it was clear that it had been placed in a scheme that was in contravention of statutes governing municipalities. Laying a charge with the police was not politicking but was the performance of a duty which he, as a Member of Parliament, had been sworn to uphold. Subsequently, the South African Police Service had confirmed that the matter had now been escalated to the Commercial Crimes Unit and the Hawks. It was the police’s job to investigate, not to wait for the Minister’s report.

Mr Mileham agreed with the Minister that the suspension or firing of municipal officials was not the responsibility of his office. But he pointed out that there was great lack of political will on the part of the ANC in the local councils to act decisively on the VBS matter. He agreed that this might be “politicking” but the fact remained that municipalities had wasted hundreds of thousands of rand of public money and people were “gatvol”. And if those responsible could treat the funds with “such disdain and contempt”, it was incumbent upon everyone to ensure that those officials were no longer in their positions where they were still in control of public finance. That is what the DA was asking for. Yet the ANC kept saying no action would be taken until a report was available. This was what the Minister was saying as well. Surely that was not being responsible?

The Minister responded that Mr Mileham's comments confirmed that the DA was only politicking, since Mr Mileham had just agreed that the Minister could not suspend or fire anyone in the municipalities concerned. The responsibility lay with the councils themselves. Why was Mr Mileham talking about the Minister “allowing” them to keep their jobs?

The Minister said the ANC, as well as other parties, were in agreement that no one would be allowed to get away with stealing poor people’s money in the VBS affair. The government was committed to pursuing the money to the last cent, as well as ensuring that justice was visited upon all responsible.

The Minister said COGTA was aware of the point raised about KPMG and other audit companies, but he assured Mr Mthethwa that there was no reason to believe that the companies engaged to conduct the investigation could not be trusted. The question of the funds being smuggled out of the country had indeed been asked but the relevant authorities had not picked up anything to suggest this had occurred.

The Chairperson thanked the Minister and his delegation. He said that the matter had been well ventilated and everyone was looking forward to the outcome of the investigation. On completion, the Committee would be very keen to have the report tabled before it for further deliberation.

The meeting was adjourned.

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