National Treasury briefed the Select Committee on the state of local government and financial management as at 30 June 2018, and said there had been a decrease in clean audits. They bemoaned the lack of consequences for transgressions and irregularities. The environment had become more difficult for auditors and other role players in the accountability area. There had been pressure on auditors to change audit outcomes. This was sometimes due to political in-fighting, as well as interference. The impact of deteriorating accountability affected the financial health of municipalities, as well as service delivery and the maintenance of municipal infrastructure.
18 municipalities had received clean audits in 2017/18, compared to 33 in the previous year, and 63 had regressed in their audit outcomes. Only 22 municipalities had improved. R907 million had been paid to consultants to assist with the production of financial statements, showing that many municipalities did not have the capacity produce the statements on their own. Only 19% municipalities could produce financial statements without material misstatements.
There were signs that municipalities were under stress when they were unable to collect revenue. This also weighed on municipal creditors, as municipalities could not pay within the required 30-day period. 51% of municipalities had overspent their operating budget, and 36% had overspent their capital budgets. The number of municipalities in financial distress had increased from 95 in 2012/13, to 125 in 2017/18, which was almost half of all the municipalities in the country. This was due to a growing number of municipalities approving unfunded budgets, as well as a lack of capacity building within the municipalities.
Members wanted to know about the expected lifespan of municipalities that were moving in a negative trajectory. They asked how best the issue of unfunded budgets should be handled, and if Treasury had explored a “back-to-basics” approach. They suggested that part of the underlying problem was the hiring of unqualified people to critical positions through cadre deployment. They pointed out there was no incentive for a clean audit and a lack of consequence management. Treasury had minimum qualification requirements as well as a cap on compensation, meaning that the wrong type of people were being attracted to work at municipalities.
Local Government Finances and Financial Management: National Treasury briefing
Mr Mandla Gilimani, Director: Budget Analysis, National Treasury, told the Committee about the Auditor-General’s finding that there had been a reduction in the number of clean audits in 2017/18, and that overall the audit outcomes had regressed.
There was a lack of consequences for transgressions and irregularities. The auditing environment had become difficult for auditors and other players in the area of accountability. There had been pressure on auditors to change audit outcomes. This was sometimes due to political in-fighting, as well as interference. The impact of deteriorating accountability affected the financial health of municipalities, as well as service delivery and the maintenance of municipal infrastructure.
There were a significant number of managers -- particularly municipal managers and chief financial officers -- at municipalities were there on an acting basis, and therefore could not take decisive action. This was affecting the level of governance at these municipalities.
He pointed out the eight criteria that were used for the financial assessment of municipalities:
- cash as a percentage of operating expenditure;
- negative cash balance;
- overspending of original operating budgets;
- underspending of original capital budgets;
- debtors as a percentage of own revenue;
- year-on-year growth in debtors;
- creditors as a percentage of cash and investments; and
- reliance on national and provincial government transfers to finance the capital budget.
He said that a growing number of municipalities had approved unfunded budgets, adding that the new demarcations in 2016/17 had not assisted in improving their overall funding positions. 124 (48%) municipalities had less than three months of cash coverage, including three metros. Overall, 51% of municipalities had underspent their operating budgets, 36% had underspent on their capital budgets, and the number of municipalities in distress had increased from 95 in 2012/13, to 125 in 2017/18.
As at 30 June 2019, local government’s total revenue was R404.7 billion, with total expenditure of R391.8 billion. Capital expenditure was R55.4 billion. Employee expenditure, or the wage bill, was R105.2 billion. Conditional grant spending was R27.2 billion.
In aggregate, municipalities closed the 2018/19 financial year with a positive cash balance of R50.1 billion. There was an improvement in cash balances, with the major contributors being the metros and local municipalities. Overall, all municipal categories, with the exception of metros, experienced an increase in creditors. The trend indicated the increasing financial pressures, as consumers were not paying for services and municipalities were not paying suppliers.
(See graphs and tables to illustrate budget allocations and expenditure)
Mr F du Toit (FF+, North West) wanted to know the expected lifespan of municipalities that were moving in a negative trajectory. How long could they sustain this negativity?
Mr Jan Hattingh, Chief Director: Local Government Budget Analysis, Treasury, said the main issue was political and leadership-related. Even though Treasury could make recommendations, they did not have the authority to enforce their implementation. It would not be possible to resolve political problems with administrative solutions.
Mr Gilimani said Treasury was in the process of collecting data. They were also currently undertaking an audit of “smart meters,” as these were going to be a prominent feature for municipalities.
Mr S Aucamp (DA, Northern Cape) said that the real issue was with the hiring of unqualified people to fill critical positions. Specifically, it was cadre deployment that was the problem, and although this might be a controversial viewpoint, it did not help to put a plaster over a wound.
Mr Hattingh said that the ruling party would be addressing this.
Mr D Ryder (DA, Gauteng) said Treasury needed to step up, because there was currently a lack of consequences for being non-compliant. There was no incentive for a clean audit, nor was there a disincentive for a regressed audit outcome. A one-size-fits-all approach would not work. Treasury had minimum qualification levels, as well as a cap on the compensation. This would attract the wrong people to seek work with local government, while at the same time driving away those who were desirable. He said that at Mfuleni municipality, Auditor-General (AG) staff members had been shot at while at their hotel. This indicated the risk of being an auditor. The fact that only 9% was spent on local government was concerning. He also believes that conditional grants are under-utilised.
Mr Hatting said that he did not agree with the South African Local Government Association (SALGA) that local government was underfunded,, because they receive the 9% in addition to their own revenue. There was no effort on their part to collect monies owed.
Mr M Moletsane (EFF, Free State) asked if Treasury had any research on alternative models of funding, as well as in-sourcing.
Mr Hattingh said that there was research on alternative models of funding, but these would not be signed off on until municipalities decreased the debtors’ book. It would not help to provide a new revenue stream when there were problems with the existing streams.
Mr E Njandu (ANC, Western Cape) wanted to know how the issue of unfunded budgets could be addressed. Had Treasury explored a “back-to-basics” approach?
Mr Hattingh said that technical work was being done in this area. There needed to be a separation between self-inflicted unfunded mandates, as well as those that occurred unexpectedly. He said 126 letters had been sent to municipalities informing them that they need to produce statements without help by 15 November 2019. The consequence of non-compliance would be that the equitable share would not be allocated.
Mr Z Mkiva (ANC, Eastern Cape) asked if non-financial assets were considered when the health status of a municipality was assessed.
Mr Hattingh said that a municipality was assessed through four lenses -- governance, financial health, institutional and service delivery. The focus on governance also fed back to the “back-to-basics” approach. Those municipalities that were failing should be called to Parliament to account. He added that Treasury, SALGA and the Department of Cooperative Governance and Traditional Affairs (COGTA) needed to work more closely together in future, and be willing to take meaningful decisions.
Mr Gilimani said that provincial Treasuries needed to look at the section 71 quarterly reports as an early warning system with regard to which municipalities needed intervention.
The Chairperson wanted to know what Treasury’s role in the scheme of things was.
Mr Hattingh said that Treasury worked in a decentralised environment, where the decisions were made by the Budget Council.
The Chairperson reminded Treasury that they needed to send recommendations to the Committee as soon as possible.
The meeting wwas adjourned.