Municipal Revenue Management Improvement Programme Underspending; Integrated Financial Management System Implementation

Meeting report

National Treasury (NT) Briefing on the Underspending in Municipal Revenue Improvement Programme

Introductory Remarks by DDG

Ms Malijeng Ngqaleni,   Deputy Director-General (DDG): Intergovernmental Relations, NT, said that allocations issued by Treasury to local municipalities are not grants, but they are allocations that are to be used to run some catalytic initiatives that will have an impact on municipal management of their revenues, as revenue management is one of the issues that affect the sustainability of municipalities' revenues.

The primary objective of the Integrated Financial Management System project is to modernise and automate the financial management systems to support the implementation of the requirements, as stipulated by the Public Finance Management Act. The importance of modernising and automating the government's financial status, procurement, human resources, planning, monitoring, and reporting systems has become more urgent, given the aged suite of technology currently being deployed.

Financial Status of Local Government
Mr Sadesh Ramjathan, Director: Local Government Budget Analysis, National Treasury, presented this section.

He said that, of the total 257 municipalities, 98 adopted an unfunded budget for the 2021/22 financial year. This suggests that 98 municipalities will spend more than the revenue collected, meaning that there may be an inability to meet financial obligations. A total of 175 municipalities were identified as being under financial distress; these are municipalities that are on the brink of a financial crisis; 219 municipalities met the criteria for financial problems and crises as per the Municipal Finance Management Act (Act No. 56 of 2003), with eminent service delivery failure. Accounting for 59% of municipalities: 151 municipalities are bankrupt and insolvent, rendering them unable to pay creditors and third parties such as the South African Revenue Services (SARS) and pension funds. A total of 43 municipalities in crisis will receive extra attention. These are those deemed beyond the section 154 support and require a corrective mode of intervention to be rescued. National Treasury, alongside the provinces, is running an initiative to rescue these municipalities. The municipalities are in great distress.

At the heart of the failure to collect what is due and pay what is received is revenue management failures, these cut across the whole revenue collection value chain, which then cuts across political and administrative leadership to enforce proper implementation of policies and legislation, whilst encouraging a culture of paying for services consumed. Non-payment of services in municipalities is a pandemic that is filtering to government departments. This is perpetuated by weak internal controls and consequent management.

Municipalities cannot expect to generate revenue if the conduit for services, which is the asset-generating mechanism, is not managed well.

As a result of inefficiencies and challenges of municipalities, the objective of the Municipal Revenue Management Improvement Programme, as introduced by the National Treasury, is to improve the generation of revenue by local government so that they become self-sustainable. This is done with an emphasis on improving the efficiency of the revenue value chain and uplifting the quality of life by providing reliable and consistent services to the communities.

Admittedly, due to the Covid-19 pandemic, he acknowledged that the programme faced some setbacks that translated into underspending, yet some progress has been made and conclusions reached. These include:
-The development of socio-economic profiles for 257 municipalities;
-Economic and financial viability studies of local municipalities in the following provinces: North West, Gauteng, Eastern Cape, and Northern Cape; this exercise informed Treasury of the potential revenue streams for the municipalities.
-Developing a user-friendly tariff setting tool to assist municipalities set cost-effective;
-Introduction of a revenue masterclass to assist municipalities with best practice procedures to optimise revenue base, potential revenue collection base better, and better cash flow management tools.

[See presentation document for more details]

Discussion

Ms E Ntlangwini (EFF) asked about the 151 municipalities represented as bankrupt and insolvent. What is the National Treasury doing to assist those municipalities and ensure the next budget allocation for municipalities does not go to the same corrupt individuals? Treasury needs to ensure some systems are in place to ensure the country's money is safe, going for its intended purposes and that services are received by the poor. Which areas and districts do these municipalities fall under? This is key information for oversight committees.

Mr A Sarupen (DA) commented that 59% of local municipalities being bankrupt is a troubling statistic. As such, the programme of improving revenue collection is noted as important. But why municipalities are not doing some of the work identified by programme? Is it because of political interference?

He also noted that there were a lot of duplications within government. In this regard, has National Treasury streamlined its support programmes to ensure no duplications with other government entities?

Ms E Peters (ANC) asked what it meant, in reality, for a municipality to be bankrupt. Are there any consequences for leadership officials – municipal managers and chief financial offers – who make the situation dire?

She also asked about the achievements of the Municipal Revenue Management Improvement Programme. The problem with the billing system has been raised since the early 2000s. How long does it take for National Treasury to help municipalities with billing issues? What are Cooperative Governance and Traditional Affairs and National Treasury doing to hold these municipalities accountable for their conduct?

Mr A Shaik Emam (NFP) asked what the root cause of issues in municipalities was. Is it the issues around capacity or cadre deployment?

On billing systems, he reckoned that there are ways to get better revenue, such as prepaid meter systems. However, from his experience in eThekwini Municipality, receiving a prepaid meter can take over two years.

According to National Treasury, what is the obstacle in ensuring value for money, ensuring communities receive services?

The Chairperson questioned the ability of the distressed municipalities to attract private sector investments. How can these municipalities improve their prospects of attracting private sector investments?

On revenue management: what can be done to ensure officials appointed in these positions have basic financial management skills? What is the issue in ensuring suitably qualified officials are employed outside political appointments – such as ward councillors? Results show municipalities do not receive many grants due to unfulfilled compliance requirements. This leads to communities not receiving services due to municipal officials who cannot satisfy requirements to ensure municipalities receive grants. How much do government departments owe municipalities? It is essential to name and shame, to get a clear picture of government's contribution to the distress of municipalities.

Responses
Ms Ngqaleni responded on the municipalities attracting the private sector. She said that the key there needs to be good governance and delivery of reliable infrastructure services.

On preventative measures for municipalities in potential distress, she said that there need to be corrective measures in the budgeting process of municipalities. The problem affecting municipalities in distress is not usually a result of Chief Financial Officers' and Municipal Managers' actions. The Council is usually responsible as they are in the culture of spending way more than the municipality has. The root cause is the structure of local government bestowing huge powers on the Councils. She said that the breakdown of municipalities in distress could be provided.

In coordination initiatives with the Cooperative Governance and Traditional Affairs Department, a strategy is agreed on, including revenue functioning. As a result, a committee has been formed to ensure coordination and alignment with the provinces, Treasury and the Cooperative Governance and Traditional Affairs Department. 

Mr Ramjathan, on viability studies, responded that the Department had undertaken the studies in the four provinces. For the remaining provinces, a tool that can be updated to assist municipalities in understanding the economic base is being developed to ensure improved revenue collection on an economic base.  

On the billing system, he said there is a need to contextualise if the problems are arising from the billing system itself or the processes feeding it. From experience, it is the processes leading to the system. These include the correct meter reading, capturing customer information, and verifying the general valuation role.

In the 43 municipalities where assessments have been conducted, National Treasury found that municipalities are not collecting as per the law. About R255 billion is owed to municipalities due to their failed debt collection policies and processes. This is why municipalities find themselves owing bulk suppliers such as Eskom and Water Boards.

The collection revenue value chain needs to be looked at to identify the root cause of non-collection in these municipalities. Is it the capacity, revenue collecting process, or incorrect customer profiling?

For the next budget, Treasury institutionalised the benchmarked and mid-year process, accompanied by an adequate early warning system to determine a crisis in a municipality.

On financial management skills, a financial management grant is being issued to ensure municipalities take in newly qualified persons as interns, with the view of absorbing them and ensuring adequate skills within municipalities. This was intended to ensure the structures were populated with adequately skilled personnel.

Government debt is a concern. Strangely enough, municipal offices treat government and business debt more leniently than they do individuals.

Mr Ismail Momoniat, Acting Director General, said that revenue collection in municipalities is in a dire state. Perhaps lessons could be learned from SARS. Some mechanism to get people to pay for services rendered is listing non-payers to the credit bureaus.

A lot of the problems in municipalities are political. Without a professional public service and municipal management, the revenue problem will not be solved. Secondly, mayors coming in with their staff every time there is a new mayor also needs to be reconsidered for the sake of continuity and professionalisation. These are critical in solving the revenue collection issues faced by municipalities.

Ms Ntlangwini objected to placing people on credit bureaus. She said this would eat the revenue, as it will not go to municipalities. How do you put a recipient of social welfare grant on a blacklist? Those systems work on the premise of increasing the debt based on interest. This proposal is unacceptable because it does not serve rural communities that struggle to make ends meet.

National Treasury IFMS Implementation Status Report
Mr Momoniat said that the IFMS had impacted National Treasury's reputation. The primary objective of the Integrated Financial Management System (IFMS) project is to modernise and automate the financial management systems to support the implementation of the requirements as stipulated by the Public Finance Management Act (PFMA).

The importance of modernising and automating government's financial, procurement, human resources, planning, monitoring, and reporting systems has become more urgent, given the aged suite of technology currently being deployed, including Personnel and Salary System (PERSAL) and Basic Accounting System (BAS). Mr Ramjathan stated that these systems had been around since he started working in government during the dawn of democracy in 1995, although they have been deemed outdated. PERSAL is still with government because of the attack launched by the Gupta family on Treasury. In May 2017, the family selectively leaked an internal audit report that protects PERSAL. Whilst the system uses a different language that is always requiring people to be taught the language of the system, there are no readily available service providers who are available to continue and understand PERSAL. As a result of the attack, many investigations were lost, and many hardworking Treasury officials were defending the process.

The Chairperson interjected and stated that the focus should be on the economics of the Integrated Financial Management System. He reiterated that Treasury has no choice but to implement the contract with Oracle for the Integrated Financial Management System, so the system can be modernised within national and provincial government.

National Treasury is in dispute with the Auditor-General on its approach to regarding contractual spending as fruitless and wasteful, with adverse audits since 2017. He stated that it is important to clarify the approach of the Auditor-General of South Africa on overfocusing on compliance rather than conventional financial auditing. The following were noted as issues:
-Focus is on irregular and, fruitless & wasteful expenditure rather than on corrupt or suspicious transactions;
-No differentiation between rule transgressions and contractual obligations vs corrupt or suspicious transactions;
-Drives risk-averseness of accounting officers, contrary to the underlying approach of PFMA, which is "Let Managers Manage, but hold them Accountable".

Ms Laura Mseme, Acting Chief Operations Officer, said that the efforts for Treasury are technical, so support and maintenance are key. The absence of this means that an out-of-date Oracle system will be utilised. This can potentially leave government departments vulnerable and at risk, as required security patches will be absent in the software. Equally, the majority of the government will not accept out-of-date versions of programmes.

For cost-saving measures, lack of support would mean forfeiture of the preferential 17% rate, as opposed to the normal 22%, of the net license fee as cost support and maintenance. This would be followed by forfeiture in the favourable discounted support fee annual increase of 0% for the first to fourth renewal years.

Concluding Remarks on the Integrated Financial Management Systems

Mr Momoniat highlighted key recommendation No 68 of the State Capture Commission:

“It is recommended that the legislation dealing with the duties and responsibilities of Accounting Officers/Authorities be amended to insert a provision that reads:
‘No person is criminally or civilly liable for anything done in good faith in the exercise or performance or purported exercise of any power or duty in terms of this Act, unless the such person acts negligently.'”

He further added that if there is wrongdoing from officials stealing money intended for the IFMS, the National Treasury promises to take investigative measures. The Auditor-General should not regard the implementation of a contract as irregular and fruitless.

Discussion
Mr X Qayiso (ANC) discouraged the Acting Director-General from making stances on political matters; the Acting DG should rather comment on administrative action of the National Treasury in undertaking their mandate. 

Mr Qayiso further expressed concern over departments proceeding to implement contracts when there is no budget for said contracts.

The ongoing dispute between Treasury and Auditor-General should be settled, as the two institutions are governed by legislation. A substantive matter was raised by either of the parties.

Ms Ntlangwini added that the problem with National Treasury and the Auditor-General has been going on for too long. National Treasury, as the custodian of the country’s funds, is not moving swiftly to resolve their fruitless and wasteful expenditure and their underspending, which have resulted from the institution’s problems. There needs to be a speedy solution to the problem.

The Acting DG responded that processes are being put in place to resolve the issue between Treasury and the Auditor-General of South Africa; it should be resolved by the end of the current financial year.

Ms Mseme said that, in this current financial year, there has been underspending and it is most likely because the budget was on the assumption that:
-The SETAs procurement process would be successful;
-On the current methodology of rapidly advancing the implementation of previous delays. So, Treasury had to give money back.

The total budget in terms of what was located, in comparison to the expenditure Treasury, will provide information on the expenditure for total spending compared to the allocation. This will be submitted to the Committee by Treasury.

The delegation was thanked and excused from the virtual meeting.

The Committee considered and adopted meeting minutes from 14 September 2022 and 16 September 2022.

The Chairperson noted the report of the oversight as outstanding. He then thanked the Members for attending the meeting.

The meeting was adjourned.