2021/22 Consolidated Municipal Audit Outcomes: AGSA & National Treasury Input

Meeting report

Opening remarks
The Chairperson welcomed everyone in attendance. She said that Members from the various provinces were welcome to participate in the meeting.

She noted apologies from Mr Du Toit and Ms Ncitha.

Briefing by the Auditor-General of South Africa (AGSA) on a consolidated general report on the Local Government Audit Outcomes for the 2021/22 financial year
Ms Alice Muller, Head of Portfolio: Audit Support, AGSA, said that local government is facing serious challenges, especially in gaining the trust of citizens who have been deprived of basic services for a number of years. Local government has been characterised by its lack of accountability, service delivery failures, poor governance, capacity issues, and instability.
She presented the overall audit outcomes for the 2021/22 financial year; as well as the improvements and regressions of provincial audit outcomes.
• The Western Cape province had the highest number of clean audits. Free State and North West did not have clean audits. North West had the highest number of disclaimed municipalities.

Mr Dumisani Cebekhulu, Business Unit Leader: Gauteng, AGSA, highlighted the role of metropolitan municipalities (metros) in the local government sphere. He said that it was necessary to appreciate the economic importance of metros and the various opportunities that metros have to make a positive impact on the lives of citizens.
He presented the overall audit outcomes of metros for the 2021/22 financial year.

• The City of Cape Town and the City of Ekurhuleni had clean audit opinions.
The improvements in the City of Cape Town stemmed from its leadership that has taken a decisive posture, in terms of a zero-tolerance approach to non-compliance with laws and regulations, particularly in dealing with issues of irregular expenditure.

The City of Ekurhuleni had clean audits for several years. This is a result of sound government practices, effective internal controls, and stability in key management positions (despite the changes at the council level). This ultimately had a positive impact on service delivery.

• Buffalo City, City of Johannesburg, and eThekwini had unqualified audit opinions with findings.
Buffalo City improved from a qualified opinion to an unqualified opinion with findings. This improvement might not be sustained, because Buffalo City relied on the audit process to identify misstatements in the financial statements, rather than improving its own internal control processes.

• Mangaung and Nelson Mandela Bay had qualified audit opinions with findings.
The regression with Mangaung was due to management’s failure to provide sufficient supporting documentation during the audit process, and failure to implement audit action plans to address internal control deficiencies. The metro also experienced instabilities with leadership at the council level.

• The City of Tshwane had an adverse audit opinion with findings.
The City of Tshwane regressed to an adverse opinion. The root causes are instabilities in leadership, incapacities in critical areas, and the continued culture of non-compliance with laws and regulations. This was worsened by the lack of consequences for poor performance and transgressions.
The presentation also provided insight into the financial reporting process, and financial management weaknesses resulting in pressure on metro finances, service delivery, infrastructure, and material irregularities of metros.

(See presentation for details)

Discussion
The Chairperson thanked the officials from AGSA for the informative presentation. She noted that the presentation made a comparison between the expenditure and service delivery, especially in indicating whether there was value for money. She invited Members to comment.

Mr D Ryder (DA, Gauteng) noted that the Members received an apology for the delay in the scheduling for this particular presentation. He did not want the Committee’s staff to take responsibility for the delay, because it was due to the poor prioritisation of the politicians that manage the Committee. The Committee was pushing Bills through instead of doing its oversight.

He felt that the presentation placed too much focus on the metros. He would have preferred more insight into the local municipalities because that is where the service delivery problems are at their worst, and it should be investigated.

He said that the Committee should follow up on the 16 municipalities with outstanding audits, of which three of those municipalities have not yet bothered to submit their financial statements. It is the Committee’s responsibility to call people to account, particularly as it represents the National Council of Provinces (NCOP), which sits in the middle of the three spheres of government. He recommended that the Committee engage with the Department of Cooperative Governance and Traditional Affairs (COGTA) to ensure that the non-submission of financial statements by the legislated deadline should result in immediate intervention, in terms of Section 139 or Section 154 of the Constitution.
The presentation suggested that municipalities with multiple disclaimed audit opinions were doing “harm to the community”. He believed that this was a deep statement, and it said a lot with very few words. This was the exact opposite of what the Constitution envisioned, in terms of good governance. He also recommended that consecutive disclaimed audit opinions should trigger immediate intervention. He asked if municipalities faced consequences for receiving disclaimed audit opinions.
He noted that Ms Muller said that a clean audit does not necessarily mean good service delivery. He understood that a clean audit included two broad aspects, one being the financial side of the audit and the second being the achievement of planned targets. He questioned if the planned targets were a reflection of service delivery. He asked that Ms Muller provide further clarity on this.

He said that Mr Cebekhulu’s comments on the “call to action” towards the end of the presentation were rather generic, it was not necessarily focused on the NCOP’s role. He asked if AGSA had any specific recommendations for the Committee’s oversight role.

Mr W Aucamp (DA, Northern Cape) thanked the representatives from AGSA for the presentation. He concurred with Mr Ryder, that the presentation placed too much emphasis on the metros. The Committee needed a thorough breakdown of what was happening in the local municipalities.
He said that some of the figures were very disturbing. In particular, 75% of metros do not have effective review and monitor compliance in place. 87% of metros do not have effective in-year and year-end reporting in place. 75% of metros do not have effective daily and monthly controls in place. 75% of metros do not have proper record-keeping in place. Overall, more than three-quarters of the metros do not have basic controls in place. This was very concerning, especially for future projections of audit findings.

It was also disturbing to note that the closing balance of irregular expenditure for the 2021/22 financial year was R45,35 billion. Less than 1% of this irregular expenditure was recovered, 4% was written off, and 96% had not been dealt with. He firmly believed that there was a lack of political will to deal with irregular expenditure at the metro and local municipal levels. People do not want to deal with irregular expenditure, because they know that their friends or colleagues might be implicated.

The City of Cape Town obtained a clean audit opinion, because its leadership set a strong tone of zero-tolerance to non-compliance with laws and regulations, particularly in dealing with issues of irregular expenditure. He believed that this zero-tolerance approach should apply across all metros and local municipalities.

He said that in yesterday’s National Assembly sitting, cadre deployment was once again protected by the government – particularly by the ANC and one other political party. He questioned whether this was the core of the problem, especially where people were appointed to positions but were incompetent in doing their jobs. In such cases, consultants were hired to do the job, but the presentation indicated that a lot of those consultants were not delivering either. He asked if AGSA had measures in place to identify expenditures that are irregular or fraudulent, and whether such findings are reported to the relevant authorities and further investigated. He asked if there were consequences for those who mismanaged the finances of metros and local municipalities.

He observed that 93% of infrastructure grants were spent. He said that on numerous occasions the infrastructure grants were spent, but it was not spent on the infrastructure projects that it should have been spent on, especially at the local government level. The municipalities would rather use the infrastructure grants to pay for month-to-month expenditures. He asked if AGSA could confirm whether the infrastructure grants were spent on infrastructure projects. If not, he asked if consequence management would be implemented if the monies were spent incorrectly.
He asked if AGSA had any recommendations for the Committee to increase its oversight role, and to increase consequence management. He asked what AGSA was doing to assist the public in bringing officials to book and to ensure that criminal charges were implemented against officials who were mismanaging the finances of metros and municipalities.

Mr M Moletsane (EFF, Free State) appreciated AGSA’s presentation. He observed that Mangaung municipality had a serious challenge with a lack of skills. This meant that its chief financial officer (CFO) and finance staff lacked the relevant skills. Nothing has been done for many years to attract people with the relevant skills, or to reduce the reliance on consultants. He said that this was a clear indication that Mangaung municipality had serious instability among its leadership. Mangaung municipality had five Acting City Managers within a period of a year. This is especially concerning because it is the people on the ground who suffer the most when there is poor service delivery. He hoped that AGSA’s recommendations to Mangaung municipality would assist in improving and stabilising the municipality.

Mr Y Carrim (ANC, KZN) said that while many of the state’s institutions crumble, some are resilient and perform extremely well. He believed that AGSA was one of the state institutions that have been consistently good for many years. It was probably frustrating for the auditor-generals to repeat the same things about municipal performance, but there was very little improvement and barely any consequences against those who were not performing. Although AGSA does what it is supposed to do, the issues ultimately reside with the politicians in all spheres of governance.
He recalled that about ten years ago, officials from AGSA explained that the municipalities with better performance would usually have a mayor or some other senior person from the Members of the Mayoral Committee (MMC) involved in effective oversight. He believed that there should also be strong oversight at the council level and that the provincial departments exercise effective oversight over the municipalities.
He asked for examples of how AGSA had taken action, given that AGSA has expanded powers to deal with the failure to comply with laws and regulations. He asked if there were lessons learnt in what results in good performance amongst the metros, especially considering the economic, social, and cultural weight of metros. 

He reiterated that the issues ultimately reside with the politicians that govern the choices that people make, and the failure to act against those who committed wrongdoing. He agreed with Mr Aucamp, that it appeared as if there was no political will to deal with the issues of irregular expenditure; and that there was a reluctance to deal with these issues because it might expose people.

He said that there was cadre development and deployment in every democracy in some form or another, but the way that it is done is highly questionable, irrespective of the political party. There was too much debate about cadre deployment. The most fundamental problem is that good and efficient people do not want to serve in the public sector. He suggested that all the problems should not simply be reduced to cadre deployment, because if another party were to take over it is unlikely that the political culture would change overnight.

Chairperson’s comments
The Chairperson said that she did not want to intervene in some of the Members' comments because she knew how passionate all the Members were about what was being discussed.

She would like to believe that the internal audit units within municipalities understood the financial cycle and that they did what was necessary instead of waiting on AGSA to attend to the issues.

She noted the concern about the lack of skills in municipalities, and that this contributed to poor audit outcomes. She questioned if this meant that there were no qualified people. She did not want to enter the debate on cadre deployment, as she had always tried to avoid politicising issues in this Committee. She would prefer that the issues be dealt with in a factual manner.

During his 2023 State of the Nation Address (SONA), the President made a commitment to professionalise all spheres of government. She said that the people working in the public sector must be fit for purpose so that they can implement legislation.

She asked if the challenges with the lack of skills were because people lacked the relevant qualifications or if they were incompetent.
She said that the reliance on consultants should be for certain purposes, and it should bring value for money. She was concerned that some consultants did not share their skills with municipal officers so that the municipalities would rely on them again. Consultants should only be relied on as an intervention strategy, but it should not be permanent. She asked if AGSA had any recommendations to reduce the over-reliance on consultants, especially in how the Committee can assist in its oversight role.

She noted the comments about Emakhazeni Local Municipality, which is a local municipality in Mpumalanga. She asked if the presenter could reiterate the comment, as she was particularly interested in Emakhazeni, as a Member from Mpumalanga.

Inputs by National Treasury

Mr TV Pillay: Chief Director: MFMA Implementation, National Treasury, said that his role in the National Treasury pertained to the Municipal Finance Management Act (MFMA) and to assist in addressing some of the challenges identified. He would comment on some of the big issues that were worth noting for this Committee and for the future Committee.

National Treasury started engaging with many municipalities, the South African Local Government Association (SALGA), and COGTA, to understand and answer the question of what is broken and what needs to be fixed. It has been a very deep-searching question, and people have different views on it. National Treasury has received comments on many aspects of the design of the current system, especially on the MFMA, which is 20 years old. There is a need to fix something that is drastically broken, and not assume that things will fix themselves.

National Treasury has created enough tools, measures, training opportunities, and engagements to train municipal officials in a number of disciplines on the financial management side. Instead of having a shotgun approach to try and fix financial management-related challenges, the National Treasury would want to redirect the conditions of the Financial Management Grant, to zoom into specific issues.

He suggested that it was time to re-look at the legal framework to assess the extent to which it is matched with what the reality checks are. There is a need to look into what pieces of legislation could be amended to give specific powers to specific role-players. This is to avoid the current situation where there are cracks in the system, but no one takes accountability. For example, the role and responsibility of the legislature is to make laws, but the legislature has zero power to hold the executive and municipal administration to account. Nothing has changed dramatically for the past 15 to 20 years. It means that the Committee might get a report and make recommendations, but it has no powers to take it forward in a way that is mandatory for the municipality.

He further suggested that the financial management in the MFMA, Municipal Systems Act, and other pieces of legislation should be streamlined to make it one responsible chain to hold specific officials to account.

He questioned whether enough powers were given to the audit committees and internal audit units of municipalities; or if they were given the type of powers that merely required them to produce reports that would ultimately be “shoved in file 13”. He said that the systems of oversight need to be strengthened in such a way that enforcement action must happen.

He believed that performance management at the municipal level was zero. He said that the National Treasury has issued an accountability framework that was delivered at the presidential Local Government Summit, in September 2022. In particular, National Treasury has issued financial misconduct and DC board regulations. National Treasury has been monitoring and has issued a UIFW reduction strategy and the relevant tools so that municipalities can take it to their councils. Despite all the energy and effort, there is still non-response when National Treasury does its oversight to follow up on what has been done. National Treasury’s oversight does not allow it to get access to the documents, which is another area that needs to be strengthened in the MFMA. The special audit services in the National Treasury should be given the power to deal with these matters.

AGSA’s response
Ms Muller acknowledged that the presentation did not give a full overview of local government outcomes and that the focus was mainly on the metros. However, the issues identified in the metros are transversal. It is the same issues that are identified across the country in different forms and formats. She suggested that the Members could also refer to AGSA’s general report and the detailed information per municipality on AGSA’s website.

She referred to Mr Ryder’s comments about the non-submission of financial statements and the municipalities with multiple disclaimed audit opinions. She replied that she would link her response to Mr Carrim’s comment on the AGSA’s amended powers. Up until 15 February 2023, AGSA had issued 268 material irregularities in the local government space. 44 of this was directly linked to causing harm to a public sector institution, in terms of disclaimed opinions and where financial statements have not been submitted. After issuing the material irregularities, AGSA has observed the responsiveness, which explains the improvement from 81% to 91% in the submission of financial statements by the legislated date. The three municipalities that have not submitted their financial statements are from a backlog over multiple years, but they are catching up on the delays.

A number of disclaimed municipalities have taken action, but the AGSA has also taken remedial action where such action has not been satisfactory. AGSA does acknowledge that it does take time to overcome a disclaimed audit outcome. Some of the issues are deeply rooted and will take a process to get to good financial disciplines. It will also require political will, as well as an intention to professionalise those municipalities.

On the material irregularities, AGSA has identified a financial loss of R5.1 billion. This may be a result of payments that were made for goods and services that were not received, an unfair or uneconomical procurement process (i.e., paying more than what should have been paid), or where there have been asset and investment losses. AGSA has also issued material irregularities for the use of consultants, where there was no value for money. Up until 15 February 2023, the accounting officers have recovered R150 million in financial losses; there was an R18.85 million loss prevented (i.e., where contracts have been stopped); and R310 million is in the process of being recovered.

AGSA intends to drive corrective action with the measures that it has in place. In 46% of the cases, AGSA has observed an improvement in internal controls of municipalities. So money is being prevented from being paid for services not delivered. In 58 cases disciplinary action is being taken, especially if no action has been taken before AGSA had issued the material irregularity. In 14 cases criminal and fraud investigations are being instituted. There was a particular case where AGSA had identified material irregularity (indicating fraud) in the Matjhabeng municipality that has been referred to the Hawks; arrests were made in July this year.

The AGSA’s amended powers are quite powerful. The AGSA is consistent in its material irregularity process, even after it has already signed off the audit report for each cycle.

She referred to Mr Aucamp’s question about whether the infrastructure grants were spent on the intended purpose. She said that in the majority of the cases, the grants are spent on infrastructure projects, but there are delays in the projects and quality control failures. So the money is spent, but the infrastructure projects have not been finalised. In such cases, the AGSA has also flagged this as material irregularities. AGSA does have a team of performance auditors (i.e., engineers and quantity surveyors) that are specifically tasked to do quality checks on infrastructure projects, to ascertain whether there was value for money.

She noted Mr Ryder’s question about the clean audit opinions. She replied that a clean audit opinion depended on the performance plan, and whether the plan was achieved. For example, in some cases, the AGSA observed that water services were provided to formal settlements, which was the target, but it neglected the informal settlements. In such cases, the municipality may still get a clean audit opinion because the set target was achieved, but it is not necessarily regarded as service delivery, because there is a big portion of citizens whose needs have not been met. A clean audit provides assurance that the priorities and performance information is reliable.

She referred to the Chairperson’s comments about the professionalisation and the capacity of the internal audit committees. She replied that the AGSA has observed that only 24% of municipalities in local government could submit credible financial statements, notwithstanding the fact that they have internal audit committees. This is why the professionalisation of the public sector is so important.
The AGSA’s general report shows that R1.6 billion was spent on general consultants. Municipalities should be encouraged to reduce their reliance on consultants. This will help force the finance teams to upskill and to ensure that they have the necessary capabilities and competence to do proper financial statements. It is also the responsibility of consultants to ensure that they transfer their skills and provide value for money so that the municipalities are left in a better position.

She referred to the Chairperson’s question about Emakhazeni Local Municipality. She replied that Emakhazeni municipality obtained an adverse audit opinion, which means that the set of financial statements that it submitted was incorrect. Emakhazeni municipality obtained an adverse audit opinion for four years.

Ms Muller handed over to Mr Cebekhulu to provide further response.

Mr Cebekhulu said that there are internal audit units in metros, but the issue is that the reports are not processed in a diligent manner. He believed that Ms Muller had covered all the questions.

Further discussion
The Chairperson thanked Ms Muller and Mr Cebekhulu for the responses. She also thanked Mr Pillay for his input on behalf of the National Treasury. She said that the presentation and discussion on the matters were very important, as it will also assist the Committee in handing over to the Seventh Parliament.

She asked to what extent has the Public Audit Amendment Act assisted the AGSA in addressing some of the issues such as unauthorised, irregular, fruitless, and wasteful expenditures. She said that the Committee was very excited when the Public Audit Amendment Act was enacted, especially because it gave more powers to AGSA.

Ms Muller replied that the enhanced powers were directly linked to the material irregularities that were raised. The identification of material irregularities is very specific, and it gets issued to the accounting officer to deal with. If the accounting officer does not deal with it, the AGSA is able to take remedial action. If the remedial action is not honoured, AGSA can issue a certificate of debt. For example, AGSA had issued a municipality with a notice of a potential certificate of debt. The process is underway according to AGSA’s enhanced powers.

She reiterated that up until 15 February 2023, AGSA had issued 268 material irregularities in the local government space. Four municipalities were in remedial action and three municipalities have been referred for criminal investigation by the relevant authorities.

She said that AGSA was very grateful for the enhanced powers, because it can raise material irregularities when municipalities do not submit financial statements, or when they pay for something that there was no value for. AGSA will continue to raise the material irregularities until the money has been recovered, disciplinary action has been taken and the internal control environment has been strengthened.

The Chairperson thanked Ms Muller for the response. She thanked the Members for raising their questions. She believed that the discussions have assisted the Committee in its understanding and that it will sharpen the Committee’s oversight of municipalities.

Adoption of minutes
The Committee considered its minutes of 6 September 2023.

Mr Carrim moved for the adoption of the minutes; Mr Ryder seconded this.

Closing remarks
The Chairperson informed the Committee that she would not be able to attend next week's meeting because she would be out of the country. She would request Ms Moss, the Committee Whip, to be the Acting Chairperson.

The meeting was adjourned.