Public Audit Bill and SALGA: briefings

Meeting report

FINANCE SELECT COMMITTEE
18 August 2004
PUBLIC AUDIT BILL AND SALGA: BRIEFINGS

Chairperson: Mr T Ralane (ANC)

Documents handed out:
Public Audit Bill [B1-2004]
Report on the analysis of municipal budgets for the 2004/2005 financial year: PowerPoint presentation
Report on the analysis of municipal budgets for the 2004/2005 financial year.
Presentation on the Public Audit Bill

SUMMARY
Mr S Fakie (Auditor General) briefed the Committee on the Public Audit Bill. The Bill is necessary to align the Auditor General Act and the Audit Arrangements Act with the Constitution and other legislation. It would also consolidate the Acts into one Act and provide a modern framework for governance and financial management. The Bill would align the functions of the Auditor General with the Constitution. It would also clarify the relationship between the Auditor General, Parliament and the Audit Office.

Mr T Mokoena (SALGA CEO) presented the Committee with comments on a review of operational and capital budgets submitted by a sample of municipalities for the 2004/2005 financial year. There is a need to revisit all recommendations made by the Financial and Fiscal Commission (FFC) in respect of the Division of Revenue Act. The equitable share did not take the FFC recommendations into account and this gives an impression that the making of recommendations by the FFC has become an academic exercise. There is no adequate explanation why they were not taken into account. It is important that the recommendations are taken seriously so as to enable municipalities to fully comply with the Municipal Finance Management Act.

MINUTES
Mr S Fakie (AG) briefed the Committee on the Public Audit Bill.

The Bill was necessary to align the Auditor General Act and the Audit Arrangements Act with the Constitution and other legislation. It would also consolidate the Acts into one Act and provide a modern framework for governance and financial management.

The Bill has domestic law, international legislation and best practice and the King 2 report on corporate governance as guiding principles and benchmarks. Various stakeholders were consulted in its drafting.

The Bill would align the functions of the AG with the Constitution. It would also clarify the relationship between the AG, Parliament and the Audit Office.

Chapter 3
This chapter deals with audits by the AG, audits of institutions by auditors in private practice and investigations and special audits by the AG. Mr Fakie drew attention to clause 11 which stipulates that part 1 of this chapter applies only to audits that the AG must perform in terms of clause 4(1) or (20) or opts to perform in terms of clause 4(3). Clause 16 of the Bill gives the AG powers to conduct searches of property, premises, vehicles and persons. In terms of clause 22, the AG must have due regard to the special nature of accounts when reporting on accounts established in terms of certain Acts. He or she might exclude confidential, secret or classified details of findings from the audit report.

Part 2 of the chapter empowers the AG to allow institutions listed in clause 4(3) to appoint private auditors to do their audits. Clause 27 specifies the powers and duties of auditors appointed to conduct audits of the institutions listed in clause 4(3).

Part 3 allows the AG to conduct investigations and special audits.

Chapter 4
This chapter covers the Audit Arrangements Act of 1992

Chapter 5
This chapter contains general provisions like the delegation of powers and duties and offences and penalties.

Discussion
Mr D Botha (ANC) noted that in terms of the Bill the AG accounts to the National Assembly (NA). He felt that the National Council of Provinces (NCOP) should also be included.

Mr Fakie replied that in terms of the Constitution, the AG accounts to the NA. The Bill had to comply with the Constitution and hence it states that the AG accounts to the NA. In practice the AG accounts to Parliament as a whole.

Mr M Goeieman (ANC) asked for an explanation on when or under which circumstances the AG has the power to decide whether to perform an audit.

Mr Fakie replied that the AG audits all government Departments. The Constitution gives the AG the option not to conduct certain audits. However, if there is likely to be a high interest in the audit the AG would conduct it. There is a need for some brainstorming and identification of the criteria to guide the AG in deciding whether to do the audit.

Mr W van Heerden (Corporate Executive Manager: National Business Units) added that in terms of clause 28, the AG could still require reports on specific issues raised in the audit.

Ms D Robinson (DA) felt that clause 22 would result in a lack of transparency. She asked if the Standing Committee on Public Accounts (SCOPA) would have the power to ask questions based on the audits.

Mr Fakie replied that the clause was extensively debated. SCOPA has the power to interrogate issues raised in the audits of the institutions. The clause is not intended to subvert accountability but to ensure that the sensitivity of certain issues is not compromised.

Mr van Heerden added that although the process would be confidential the report would be tabled in Parliament.

Mr V Xaba (Chairperson of Standing Committee in KwaZulu-Natal) remarked that part of the AG's duties is to do audit performance and this is not mentioned in the Bill. He asked if this duty was excluded because it is immaterial.

Mr Fakie replied that financial management involves performance audits. There were also various clauses in the Bill that allow for performance audits.

Mr Z Kolweni said that there is a need to harmonise systems as the AG takes over the auditing of various institutions.

The AG replied that the Office of the AG is already facing problems. The Municipal Finance Management Act makes it mandatory for municipal entities to be audited by the AG. Private companies currently audit some municipalities and a letter would soon be sent to all municipalities to draw their attention to the requirement of the Act. In cases where the AG decides not to conduct audits, the auditors appointed would have to follow certain standards.

Mr E Sogoni (ANC) asked for reasons for the disbanding of the Audit Commission. He also asked why the Deputy Auditor General has to be appointed by the AG.

Mr Fakie replied that there was a long debate of the discontinuation of the Commission. The Office of the AG enjoyed certain benefits of having the Commission and it was not involved in the decision to discontinue it. The main issue is that the AG does not want to be accountable to the Commission but to Parliament as required by the Constitution. The Audit Commission had three external members and this gave rise to a feeling that it was not a parliamentary body and therefore not the right institution for the AG to account to.

With regard to the appointment of the Deputy AG, he replied that there has to be consultation with some oversight mechanisms before the appointment is made. It is important to involve the AG in the appointment of the person since that person would head the office in the absence of the AG.

Mr Xaba asked for motivation for the inclusion of clause 7(2).

Mr Fakie replied that research was conducted on the remuneration of the AG in different countries. In some countries the AG's salary is on a par with that of a senior judge. The clause does not stipulate how much the AG must be paid. It is only a benchmark.

Mr Sogoni asked if the functions of the Audit Commission would be assumed by the audit committee to be established in terms of clause 40(1)(a).

Mr Fakie replied that clause 40 deals with governmental arrangements. The committee to be established would perform some of the functions that were performed by the Commission.

Mr Ralane wondered how one could ensure that an independent body accounts to Parliament. There is a need to spell this out in the Bill. There should also be some clarity on the kind of oversight mechanism that has to be put in place. The issue of who appoints the oversight mechanism also needs to be clarified. It is problematic that the Deputy Auditor General has to be appointed in consultation with the oversight mechanism. He felt that it is important to get some legal opinion on these matters.

Mr Fakie replied that the Bill was taken to the State Law Advisors for comment on various issues. The decision on the establishment of the oversight mechanism was left to Parliament to make. It is very important to establish the mechanism urgently.

Mr Sogoni asked if the Staff in the Office of the AG falls under the public service administration and is therefore subject to the Public Service Act.

Mr Fakie replied in the negative. The Office of the AG is independent and this is important to allow it to be able to attract the skills and competencies it requires. However, there are some checks and balances.

South African Local Government Association (SALGA) presentation
Report on the analysis of municipal budgets for the 2004/2005 financial year

Mr T Mokoena (SALGA CEO) presented. The purpose of the presentation was to present comments and provide some trends based on a review of operational and capital budgets submitted by a sample of municipalities for the 2004/2005 financial year.

During the 2003/2004 financial year, SALGA started to analyse and comment on budget trends based on information obtained from sample municipalities. For the 2003/2004 financial year, the report focussed only on operational budgets whilst this year has been extended to also include capital expenditure and the effect of tariff increases on household consumers.

Most of the municipalities' budget was spent on salaries, wages and allowances (30%) and general expenses (45% to 48%).

Salaries, wages and allowances in general remain constant as a percentage of expenditure. General expenses increased below inflation. Controllable costs such as telephone, transport and subsistence, stationary and printing still require good financial management. Repairs and maintenance in general were still well below the norm. Capital costs are decreasing due to cash flow constraints.

Tariff increases were in general below inflation targets. Free basic services benefit smaller users and electricity remained the main source of income. Assessment rates as the second largest source of income and there is potential to increase the income base in rural areas. Devolution of water services will pose major challenges in respect of payment. Municipalities in general and specifically smaller municipalities are not providing adequately for bad debt reserves. Outstanding debtors as a percentage of the operational budget are constant but still alarmingly high. Cash flow constraints have a negative impact on capital expenditure and the needs of the IDP.

There is a need to revisit all recommendations made by the Financial and Fiscal Commission (FFC). The equitable share did not take the FFC recommendations into account and this gives an impression that the making of recommendations by the FFC has become an academic exercise. There is no adequate explanation why they were not taken into account. It is important that the recommendations are taken seriously so as to enable municipalities to fully comply with the Municipal Finance Management Act.

The availability of data remains a major problem and as a result most municipalities do not know the different dynamics in place within them. There is also a problem around the raising of revenue by municipalities. Some municipalities have no revenue-raising base at all and the equitable share should take this into consideration. Only big municipalities have the capacity to cross subsidize basic services.

Discussion
The Chairperson said that the current NCOP was very militant on oversight and it would look at the recommendations so as to identify those that were not taken into account. It is important to establish the reasons why they were not implemented.

Mr D Botha commented that most municipalities only have budgets on paper and that they are not functioning properly. He was of the opinion that municipalities had the necessary data required by the FFC and SALGA. He asked why the FFC recommendations were not implemented.

Mr Mokoena replied that there are serious disparities in the data possessed by the Municipal Demarcation Board, Statistics South Africa and the municipalities. The Division of Revenue Act does provide some answers as to why some recommendations were not implemented. However, the explanations are not adequate. The issue of the revenue-raising base remains a major problem in some municipalities. Some of the municipalities are technically bankrupt for a number of reasons. Some of the reasons are related to bad management.

Mr Goeieman asked why it is difficult for municipalities to raise loans.

Mr Mokoena replied that only big metropolitans have the necessary collateral to raise capital.

Mr Kolweni asked if SALGA was happy with the overall recommendations by the FFC.

Ms Robinson asked which sphere of government is responsible for maintaining libraries.

Mr Sogoni agreed that there is a need to check with National Treasury why the recommendations were not implemented. However, he felt that recommendations were recommendations and nothing more.

The Chairperson disagreed with the view that recommendations are just recommendations. He indicated that a lot of research is done before the recommendations are formulated and this involves a lot of money.

Mr Kolweni said that Eskom delivers electricity directly to consumers. The money for electricity is given to municipalities as part of the equitable share. However, after looking at the equitable share of municipalities it is difficult to identify the money allocated for electricity. It is argued that if municipalities deliver free electricity they would go bankrupt. He asked if SALGA had any views on how to ensure that there is free delivery of electricity.

Mr P Myron (FFC: Executive Manager-Commission Coordination) said that the FFC provides reports to Parliament and parliamentary committees write reports on the FFC submission. The reports are submitted to the executive and the question is whether the committees request the executive to respond. In terms of the Intergovernmental Fiscal Relations Act the executive has to respond.

Mr Botha said that it is difficult to see how municipalities would be able to spend monies allocated to them given the fact that they do not understand the MFMA.

The Chairperson said that the MFMA is being implemented in phases.

Mr Botha wondered what happens in the meantime if the MFMA is being implemented in phases.

Mr Mokoena replied that the capacities of municipalities differ. It is important not to make general statements and say that big metros are capable of spending because some of the big metros do not even understand the Labour Relations Act. It is a challenge to get all the municipalities to understand the MFMA. SALGA is currently busy with information dissemination and training on the Act. It is the responsibility of parliamentary committees to ensure that there is constant monitoring of the implementation of legislation.

Ms N Mokete (Johannesburg Metro) briefed the Committee on the state of affairs in Johannesburg. She indicated that she was not prepared to make a presentation before the Committee. She consequently just highlighted some of the issuing facing the metro.

The devolution of functions remains a challenge. Health services would soon be devolved to municipalities but it is unclear where funds for the services would come from. The metro is in the process of establishing new institutions as required in terms of the MFMA and it is funding them from its allocation.

She said that the equitable share is not a conditional grant. For the past few years the equitable share was committed to basic services and these are not necessarily free basic services. The challenge is to get money for free basic services. There is a need to have data in one central point in one format.

The Chairperson said that the migration of people to Johannesburg makes the data unreliable.

The meeting was adjourned.