Municipal Audit outcomes of Mfuleni, Tshwane & Johannesburg Municipalities: AGSA briefing

Meeting report

Briefing by Auditor-General of South Africa (AGSA) on Tshwane Metropolitan Municipality
Mr Xolani Zicwele, Office of the AGSA told the Committee the municipality received an adverse audit opinion for the 2021/22 financial period. This has been happening for the past four years. Most issues were a repeat and were raised in the past, but management has not been putting corrective measures in place.

There was regression because of a worsening control environment, which resulted from not addressing IA  and AGSA findings and implementing recommendations. The overall stagnation was because of a culture of non-compliance. This, in turn, was because of a lack of accountability and poor monitoring of implementation of policies and prescripts; inadequate consequence management; transgressors, existing policies, and legislation not being held accountable; inadequate knowledge of contract management and procurement prescripts; and lack of adequate internal controls to prevent non-compliance.

There was inadequate monitoring and implementation of the action plan to improve internal control. There was ineffective and untimely oversight by all oversight structures, caused by management’s lack of cooperation, poor control environment, inadequate monitoring and review of monitoring, which was necessary for reliable financial and performance reporting, appropriate records management, ensuring compliance with legislation, and lack of competence and adequate skills to discharge Municipal Finance Management Act (MFMA) responsibilities and service delivery.

On consequence management, leadership did not set the tone for accountability and consequence management. This resulted in a backlog of investigations and increased Unauthorised, Irregular, Fruitless and Wasteful (UIFW) expenditure. Accountability structures were not effective. There were IA instabilities and no timely and effective monitoring (APC, MAYCO, MPAC). Poor performance and transgressions were not addressed at all. Instability in the internal audit unit had an impact on consequence management

The poor state of the financial health of the municipality was because of an ineffective financial recovery plan, poor collection of debt, and management of liabilities. Revenue collection was worsening as impairment of debt increased. Collection initiatives were not yielding adequate results. Liabilities were not well managed, mostly because of weak accounting processes, and this was negatively impacting liquidity and effectiveness of the recovery plan.

Concerning service delivery, the lived realities of the citizens of Tshwane were regressing because of poor service delivery. Poor service delivery performance was due to inappropriate asset management leading to worsening and ailing infrastructure. The treatment of wastewater did not follow legislation. There were no controls to monitor usage of chemical toilets by residents, bulk infrastructure was not provided for some housing units, and poor-quality effluent was discharged into some water sources. Many housing units were completed but were illegally occupied because of delays in issuing papers or permits.

Mr Zicwele said fruitless expenditure decreased compared to previous years. There were poor actions to address transgressions and expenditure. There were 11 material irregularities (MIs), resulting in a loss of R444m. The accounting officer was taking action on three MIs. Failure in the accountability ecosystem resulted in an adverse outcome. Senior management failed to ensure internal controls were in place, the audit committee did not advise the accounting officer on internal controls, and there was no oversight on the composition of the Municipal Public Accounts Committee (MPAC).

Leadership should set the tone for applying consequence management, from the top. Record-keeping and financial discipline should be put in place. Staff capacity should be built. Maintenance of infrastructure was very important, as well as performance management of the city, which needed to be re-looked.

See presentation attached for further details

Briefing by AGSA on Johannesburg Metropolitan Municipality
Mr Tshwarelo Moloi, Senior Manager, AGSA said the municipality received an unqualified audit opinion with findings and has remained stagnant on its audit outcomes over the last five years. This was because of instability, vacancies in key positions, slow responses from management, audit action plans not being effectively implemented to address internal control deficiencies, poor record-keeping resulting in limitations on performance reporting, and no consequence management which has been implemented.

On conditional grants and key projects, contracts did not include price adjustments and were not comprehensive; inadequate project management was provided to poor-performing contractors at the Jhb Development Agency (JDA) and was not recovered, and there were delays in the completion of long outstanding projects meant to improve adequacy of electricity. Some chemical toilets were in poor condition.

The irregular expenditure increased by 15% in the current year. The majority of this expenditure was attributed to existing contracts which were found to be irregular in prior years. The instances of non-compliance known to exist in the environment related to deviations, supply chain management (SCM) processes and policies, which is what was also noted in the current year. The slow implementation of the turnaround strategy aimed at reducing the UIFW in the city contributed to the extremely high balance of irregular expenditure, currently sitting at R6.7b.

Fruitless and wasteful expenditure for the year saw a huge increase from what it was in the prior year. The main driver of the 237% increase in the current year was the fruitless and wasteful expenditure incurred on South African Police licenses, which were procured but never utilised, amounting to R219m (64% of the total increase). Preventative controls were inadequate as the municipality did not seem to be able to prevent new instances of fruitless and wasteful expenditure from occurring. There were also four MIs with an estimated financial loss of R243.5m.

In the previous year, 986 investigations were still in progress - this increased from the previous year. The backlog of UIFWE investigations resulted from capacity constraints within the Group Audit Risk Unit, Internal Audit Unit, and the Group Forensic Investigations Unit. The municipality also did not have a disciplinary board in place to assist with accelerating the rate at which these instances are dealt with. Political instability has also been playing a major role in the delays in dealing with UIFW, and the position of the units meant to investigate UIFW were currently vacant.

To improve financial health, the city developed a financial recovery plan which was shared with the Council, Treasury, and Department of Cooperative Governance and Traditional Affairs (Cogta). Although this plan is being introduced, the city still struggles with debt collection and experiences high provision for doubtful debt. The city developed a sound information technology (IT) system on governance and security of information, which is imperative for a sound reporting structure. The status of IT remains a concern because of issues in IT governance controls.

Mr Moloi said the accuracy of the indigents’ register of the municipality remains a concern. It still contains a number of beneficiaries who are unduly benefitting, for example, households with sufficient income, and deceased beneficiaries. These issues have been raised in previous years, but no action has been put in place to address them. To address the problem, the municipality should embark on a more targeted approach /campaign to identify eligible residents to be registered on the indigents programme. The ward councillors would be crucial in driving deeper and more target awareness in the regions and communities the ward councillors serve.

Concerning failures in the accountability ecosystem, many factors came to play. Although the controls are designed and in place, these have not been consistently and appropriately implemented by senior management. The City Manager vacancy may have impacted decision-making because of instability. Instability in the Council also kept the Acting City Manager busy with administrative matters and less care was given to the day-to-day functions of the City Manager. As far as the MPAC has been active, it has not been harsh enough in holding the accounting officer accountable for transgression of laws and regulations, and holding senior management accountable for ensuring the overall control environment is improved to support the desired audit outcome.

Mr Moloi said to improve the control environment, the oversight structures should ensure the municipality shifts the culture toward ensuring service delivery is prioritised, the needs of the citizens are prioritised, and there is value for every rand spent.

See presentation attached for further details

Briefing by AGSA on Mfuleni Metropolitan Municipality
Mr Nerosen Venketsamy, Senior Manager, AGSA, told the Committee the audit outcomes on the financial statements have regressed from unqualified in previous years to qualified opinions in the 2021/22 financial year. The municipality has also remained stagnant with a qualified opinion in the selected key performance area. Compliance with the laws and regulations has remained a concern as there were repeat non-compliance findings from the prior year. The municipality achieved 46% of its targets. The financial statements submitted for audit purposes were not free from material misstatements. This is because of a lack of adequate review processes by management before submission for audit. The financial sustainability of the municipality requires serious intervention. To improve the audit outcomes, management and governance need to set the correct tone at the top and provide effective oversight responsibility on financial and performance reporting, compliance with laws and regulations, and related internal controls.

The municipality incurred irregular expenditure amounting to R232 305 800 in the current year of assessment. Fruitless and wasteful expenditure of R827 881 210 was incurred in the current year. Unauthorised expenditure also increased by R2 708 864 475. Irregular, fruitless, and wasteful expenditure incurred by the municipality were not investigated to determine if any person was liable for the expenditure. The debtors’ impairments continue to increase on a year-on-year basis because of poor collection rates. This has a negative impact on the cash flow of the municipality as the resources needed to provide basic services have diminished. Distribution losses for both water and electricity continue to be high. It was recommended management should implement adequate review processes on the annual performance report (APP) before submission for audit, to ensure the information reported is valid, accurate, and complete. Three MIs were in process and the accounting officer had to take action.

On key projects, the infrastructure of the municipality was found to be in a dilapidated state when the AG conducted site visits in the three wastewater treatment plants in Leeukuil, Sebokeng, and Rietspruit. It noted the sites were not effectively safeguarded and maintained to prevent malfunctioning, theft, and vandalism. This was why wastewater works were not operating as intended. Environmental risks relating to wastewater management were not identified and monitored during the period under review. Final effluent discharged into the rivers was not consistently measured, nor monitored throughout the year. Testing of effluent discharged did not occur for up to eight months of the year under review. The quality of the effluent discharged at the wastewater treatment plants of the municipality was non-compliant per the licence conditions of the plants, as required by the legislation.

The status of IT control required management intervention as the IT audit outcomes remained stagnant compared to the prior years. The IT general controls were not effective in ensuring reliance on IT controls. The stagnation of IT audit outcomes was because of failure to implement the action plans recommended by AG. An IT risk assessment was not conducted to identify the risks affecting IT environment for the 2021/2022 financial year. The municipality did not have an adequately documented Disaster Recovery Plan and facility because of procurement delays. As a result, no disaster recovery tests could be performed, and because of weaknesses in the IT environment, the municipality faced an increased cybersecurity risk.

To improve the audit outcomes, the AGSA recommended risk management processes should be strengthened in the area of monitoring of implementation of risk management initiatives to mitigate risk to an acceptable level; vacancies on SMS level should be filled to stabilise the Department; management should implement the recommendations and advice by the Audit Committee in an attempt to strengthen the internal control environment; and management should timeously address root causes in audit findings identified by the AGSA and Internal Audit to avoid repeat findings on compliance matters. Management

See presentation attached for further details

Discussion
The Chairperson said the Committee decided to get this briefing from the Office of the AG to hear the audit outcomes of the three municipalities because the Committee would be paying an oversight visit there. It was important to have prior knowledge so Members were empowered when they engaged with the municipalities.

Mr C Smit (DA, Limpopo) wanted to know from Tshwane Municipality if there were any opportunities in municipalities for officials to manipulate documents to influence audit outcomes, and if such a practice existed, how it could be curbed. He asked about what impact the decision of the court had on the administration as far as the audit report went, specifically when the court said the administration placed in Tshwane was illegal. He asked if there was deliberate sabotage from the Chief Financial Officer (CFO) which led to the audit outcomes.

He asked Mfuleni Municipality if the new administration improved or deteriorated the situation. He enquired why the administration was lifted because the municipality was placed under administration; and asked how Section 139 could be improved to ensure it was doing what it was supposed to be doing.

Mr Zicwele said in any environment, there was a possibility for documents to be manipulated to reflect an incorrect state of affairs. In the Tshwane environment, nothing was picked up in the previous audits. To curb manipulation practices, it was important to enforce consequence management at the top, hold people to account, monitor effectiveness of controls, and audit committees not be incapacitated to pick up risks. The municipality would need to implement preventative controls to avoid repeats.

He could not say the change of administration had a direct link to the audit outcome, and said he could not pin down any deliberate action from the CFO to get a particular outcome. The whole thing was about non-action to ensure financial statements were of good quality.

Mr Venketsamy said the Mfuleni Municipality was under administration according to Section 139 and this ended at the end of 22 August. The main interventions were over the finances of the municipality, procurement processes and contract management. There was no benefit from the process because there is still regression on what was there before, the financial health of the municipality has not improved, and even the communities have not benefited when it comes to service delivery. The process has seen no capacity building in the business regarding operational and audit outcomes. The municipality is running as normal. This was a partial administration process.

Ms S Shaikh (ANC, Limpopo) said an adverse finding in the Tshwane Municipality and seeing a general regression was disconcerting. She wanted to know how long the CFO has been with the municipality and what the capacity was within the Financial Management Unit of the Municipality. She wanted to understand how stable the Audit Committee was, and if the municipality was getting adequate support from the national government.

Regarding Johannesburg Municipality, she wanted clarity on the lack of consequence management and increasing UIFWE; she asked for clarity on the vacant CFO position and high vacancy rate; and asked if the Financial Management Unit was getting adequate support.

Regarding Mfuleni Municipality, she wanted to know what the capacity issues were in the Financial Management Unit and Audit Committee. It was clear the municipality was working on an unfunded budget and the financial recovery plan was not implemented.

Mr Zicwele said the CFO was there for the tenure of his contract, which was at least five years. The headcount in the Finance Management Unit of Tshwane was thin, though a lot goes into accounting for finances. The skillset put in place was quite inadequate for preparing financial statements. The Finance Unit has been centralised, which means there must be strong capacity, but Tshwane has been thin over the previous years.

He did not know specifics about MPAC support because the structure was new to the environment, even though he noticed some support coming through. The AG was also capacitating MPAC with know-how on what it was supposed to do. There has been support in the environment and he hoped it would increase.

On the Audit Committee, he said it played a key role in ensuring internal control was in place. The Audit Committee was incapacitated by vacancies in its Unit, and instabilities. The financial statements were prepared badly and this showed lack of internal cooperation.

Mr Moloi said the matter of stagnation was highlighted and concerns were raised about the action plans Johannesburg Municipality had to redevelop for adequate implementation to assist departments wanting to address identified matters.

He admitted there were increases in UIFWE. No concerns were raised about the capacity of the MPAC structure, but its decisions had to be actioned by the City Manager to ensure its oversight role was changing the situation. The AG raised concerns about investigations which have not been started because funds needed to be recovered. Very few investigations conducted have not been completed so far. During the year under review, there was an Acting Group CFO to assist with submissions for audit. The previous CFO left at the end of June 2022. A process to find a permanent CFO was underway, having been started in the first quarter of the current financial year. A central team reported to the Group CFO even though the Finance Management Unit was segregated. A high vacancy rate has been noted within the Audit Committee. This resulted in delays in the completion of reports, tracking progress on investigations undertaken, and implementing recommendations from management.

Mr Venketsamy said the current CFO was on suspension and the contract of the Municipal Manager ended last year in December. There has been instability in administration and leadership, including vacancies. The Internal Audit Committee has not been effective. It has not reviewed the financial audit statements and the management did not take its recommendations seriously. MPAC was a new structure. Forensic reports were tabled but are still outstanding, and there was a lack of consequence management.

Mr K Motsamai (EFF, Gauteng) asked who was responsible for administration in Mfuleni Municipality because there were still places with no water and electricity, even before loadshedding. He knew this because he lived there. An oversight visit had to happen to see how people in Zone 10, Sebokeng and Marikana lived as there had been no job opportunities and electricity there for over ten years.

Ms N Ndongeni (ANC, Eastern Cape) asked all the municipalities if there was a plan to correct the situation.

Mr Zicwele said the AG had engaged the Tshwane Municipality on key recommendations a couple of times. These were to be considered by the Accounting Officer. The AG has not yet seen the final action plan.

Mr Moloi said the AG also looks at the action plans of the municipality to address inadequacies noted with previous municipalities. The challenge was following the action plans to see if recommendations were implemented and appropriate actions taken.

Mr Venketsamy said the municipality had been classified as doing harm to itself and the communities. The AG has been trying to employ steps to change the culture inside the municipality.

The Chairperson said the situation of Tshwane Municipality was concerning because it was the capital city of South Africa and it should lead by example. Regarding the audit opinion, he asked how political instability has played itself out and contributed to the current situation. He wanted to find out how the administration which was imposed on Tshwane got nullified by the law.

He asked the Committee to be given information on rands and cents regarding fruitless, wasteful, and irregular expenditure from previous audit reports to the current ones, on all municipalities. He asked the municipalities to share information with the Committee on the oversight role of the municipalities over their entities. He asked Mfuleni Municipality to send the Committee all the information about the state of the municipality, so Members could prepare for the oversight visit and engage with internal and external stakeholders.

Mr Zicwele said the administration was in place for less than a year. There was an acting CFO when the court ruled, but now there is a permanent CFO. The entities of Tshwane were not big, but its environmental controls were better than those of the city. It did not have many transgressions and irregular, fruitless, and wasteful expenditure compared to the city. It has good audit committees.

Mr Dumisani Cebekhulu, Business Unit Leader, AGSA, said political instability in the Tshwane Municipality had been observed for a number of years. It has been seen in the audit outcomes. When there was new leadership, committees had to be reconstituted. The focus on projects tended to change, depending on the priorities of the new leadership.

Mr Moloi said information on rands and cents would be made available to the Committee. There were pockets of improvements which have been noted on the entities, compared to the municipality. Water-related governance issues were getting overseen through the Governance Unit of the Municipality.

Mr Venketsamy said the intervention of the army was to stabilise the region while infrastructure was being fixed, but it has been moved out. Now there were plans in place to fix infrastructure problems.

Mr E Mthethwa (ANC, KZN) asked if the management report, published for all municipalities, could be forwarded to the Committee and asked if it was confidential.

Mr Zicwele said the management report, in its nature, was an internal document. Its provision should not be a problem if the Committee asked for it from the municipality.

Mr Smit wanted to understand if the AG was getting threats from the MPAC and audit committees when it was doing its audit work. It was important to look at the effectiveness of these structures. He asked what the cost implication was for the Administrator in Emfuleni for the 18 months duration, and he suggested the Administrator should be summoned to appear before the Committee.

Mr Cebekhulu said it had not encountered any threats from the three municipalities compared to the previous years.

Mr Mthethwa asked the municipalities to forward their management reports to the Secretary of the Committee before Members embark on the oversight visit.

The Chairperson said the AG gave the Committee three presentations to study prior to the engagement.
The next step would be to visit the three municipalities.

He asked the AG to give the Committee a summary of the audit outcomes and to avail itself during the three-day oversight visit. The oversight visit has been scheduled to start on 13 March 2023. The Committee should ensure the municipalities prepare reports on the state of affairs, as reported by the AG and action plans. The Committee needs to understand the views of all stakeholders.

The Member of the Executive Council (MEC) for COGTA in Gauteng should also brief the Committee, including the administrators of Tshwane and Mfuleni.

The meeting was adjourned.