2022/23 Local Government Audit Outcomes

Meeting report

The Chairperson welcomed the Committee and explained that the Auditor-General of South Africa (AGSA) had a constitutional mandate, and that it aimed to strengthen the country’s democracy by enabling effective oversight and accountability in the public sector.

The Committee discussed the upcoming programme for the medium-term budget policy statement (MTBPS) and the cancellation of its upcoming oversight visit.

MFMA 2022/23 audit outcomes

Ms Alice Muller, Head of Portfolio: Audit Support, AGSA, presented the 2022/23 Municipal Finance Management Act (MFMA) audit outcomes, highlighting key findings and challenges in local government financial management in South Africa, emphasising the need for accountability and effective service delivery. The presentation stressed a culture of institutional integrity, performance, transparency, and accountability to improve local government service delivery and ensure ethical leadership.

Audit outcomes

• Overall audit performance: Audit submissions noted slight improvements, but significant regression and financial mismanagement persists in many municipalities.
• Types of municipalities: Challenges were widespread across the metropolitan, district, and local municipalities, with budget allocations ranging widely, and poor performance in infrastructure delivery and financial management.

Performance planning and reporting

• A large portion of municipalities failed to provide credible or reliable performance reports, with nearly 48% of audited reports being of poor quality. Key issues included a lack of transparency, service delivery failure, and poor strategic planning.

Infrastructure delivery

• Significant delays, cost overruns, poor quality construction, and underutilisation of completed infrastructure projects were common. This was attributed to inadequate management, skills shortages, and insufficient accountability in infrastructure projects.

Financial management

• Over 50% of municipalities showed signs of financial distress, with widespread unauthorised, wasteful, and fruitless expenditure. Major issues included weak financial controls, poor record-keeping, and non-compliance with procurement practices.

Material irregularities

• Numerous irregularities were identified, including fraud, non-compliance, and mismanagement of public funds leading to significant financial losses. Efforts were underway to recover funds and take corrective actions, but more stringent measures were needed.

Recommendations:

• To improve accountability, AGSA recommends professionalising local government, filling skills gaps, and fostering a culture of ethics. Additionally, better governance, intergovernmental support, and strict consequence management were necessary to prevent recurring issues.

Impact and next steps

• The AGSA calls for immediate action to address governance failures and instil a culture of accountability in local government, focusing on improving service delivery and financial management practices across municipalities.

See attached for full presentation

Discussion

Mr D Ryder (DA, Gauteng) drew attention to the slide regarding the number of clean, unqualified, qualified and disclaimer audits, and commented that there had been a slow improvement in that area. He said that having clean and unqualified audits was positive. He explained that the difference between an unqualified and a clean audit was determined by a municipality achieving its key performance indicators (KPIs). He wondered if the AGSA should provide guidelines to ensure KPIs were not altered to improve audit outcomes. He asked if the AGSA had a recommended list of steps to help municipalities move from unqualified to clean audits.

He asked how the National Council of Provinces (NCOP) could improve audit outcomes. He questioned whether municipalities with disclaimer audit outcomes or those that had not submitted reports were under Section 139 or Section 154 interventions. He argued that if the interventions were in place, the problem might be at the provincial level. He requested a list of municipalities in these situations, and for clarity on whether interventions were in place. He also suggested that Section 139 should automatically be implemented when a municipality fails to submit its financials or receives a disclaimer audit outcome.

He highlighted that the issue of misspent grant funding fell directly on the shoulders of the Appropriations Committee and the NCOP, and should result in immediate action. He suggested that the Committee note which municipalities were facing this issue and flag this for a later discussion.

He also raised concerns about audit committees and Municipal Public Accounts Committees (MPACs), questioning their impact and cost-effectiveness.

Mr J Britz (DA, Eastern Cape) said that the audit outcomes were deteriorating. He asked if more legislation, training, or the right people were needed to drive change. He questioned how a culture of ethics could be instilled.

Mr P Swart (DA, Western Cape) stressed the need for strong leadership in local municipalities. He argued that municipalities and state-owned enterprises (SOEs) were the dipstick for the future of South Africa, and that they were not looking good.

He referred to the lack of skills presented in the slides, and questioned if the lack of skills mentioned was among the permanent officials or the political leadership.

He asked if the AGSA monitored whether municipalities had implemented corrective actions from previous reports, and what challenges existed in ensuring this.

He pointed out the lack of service delivery in municipalities and emphasised the need to act. He argued that there was a lack of political will which had led to no consequence management.

Mr J Majola (MK, KwaZulu-Natal) referred to the Western Cape, which received a four-star rating, and asked if the current legislation allowed for sharing expertise on financial management and other skills.

He inquired about the additional powers granted to the AGSA in 2019, asking if they were used in only 19 municipalities, and whether they were being fully utilised.

He emphasised the gap between audit reports and the realities faced by municipalities. He questioned whether the circumstances of municipalities were considered when there was unethical behaviour, stressing that the circumstances needed to be considered.

Ms A Siwisa (EFF, Northern Cape) referred to unspent infrastructure grants, and asked how this would affect a municipality in receiving future grants. She noted that there was a serious problem with making payments on time. At a national and provincial level, this was either because of a delay in payment, or the signing of a memorandum of understanding (MOU). She requested clarity on where the problem was at the local government level, and its impact.

She referred to the issue of skills, and asked who was responsible for ensuring people had the correct qualifications and relevant skills.

She brought up the use of consultants, and inquired about the protocol for sharing information on consultants across municipalities. She explained that transparency in this area would prevent consultants from exploiting or defrauding the government.

Ms S Nxumalo (ANC, Mpumalanga) drew attention to a municipality that had not submitted a performance report in 14 years, and suggested punitive measures, such as withholding their equitable shares.

She commented that instability in municipalities negatively affected service delivery, and argued that MPACs should be strengthened or assessed to determine if the right people were employed. She referred to internal controls and audits, and the need to use them to identify and tighten loopholes.

She mentioned the issue of unfunded budgets that the Committee had discussed the previous day, and reiterated that it was an issue. The Committee had the task of ensuring that municipalities had a willingness to deliver services. She added that there needed to be firm leadership to encourage political will.

The Chairperson raised the issue of political interference and requested the AGSA to share its discussion and recommendations with the Committee.

She asked how to make the internal audit committees more impactful, and if there could be intervention before the involvement of AGSA. She asked if there should be legislative intervention to assist in this matter.

She questioned how the AGSA and the Committee could close the gap between audit reports and actual service delivery. She noted that while the paperwork showed positive results, the service delivery on the ground did not reflect this.

AGSA's response

Ms Muller noted that the root causes and recommendations in the report were the same as in previous years. She agreed with the Committee that the problem stemmed from a lack of political will. She argued that there had been many cases where political will had been able to improve a situation. She was happy that local government had become a priority.

She referred to the questions on the audit committees and internal audits. She said that the Committee should engage with audit committees to get value out of them. In rural areas, the internal auditor was often one person who became part of the community, and their independence would become compromised. She said research showed that there were benefits to centralising audits. She noted that not all internal auditors belonged to a professional body, and said the issues with internal auditors needed more attention.

She referred to the question about legislative interventions, and commented that, in most cases, the issue was in the implementation of the legislation, rather than a lack of legislation. She said South Africa mostly had good laws, but there was a culture of not respecting the law.

Ms Muller said that with the implementation of Section 139, the three spheres of government came into play. There have been cases where the intervention was unsuccessful because the municipality resisted the intervention. It was difficult because there were no regulations. She added that the Department of Cooperative Governance and Traditional Affairs (COGTA) was proposing a new bill that would put regulations in place. She said there needed to be a common vision across the three spheres of government.

She addressed the question on clean audits and service delivery, and said that with infrastructure projects, the small amounts were not paid close attention to. This had become an issue with the construction of stadiums, and demonstrated a need to look at smaller budgetary amounts.

She agreed with the Chairperson that clean audits should not be celebrated. A clean audit only indicated that the report was correct, but not that the municipality had performed well.

She confirmed that Renosterberg had not submitted reports for 14 years, and that punitive measures were being considered.

She commented that just over 30% of MPACs were effective, with many failing to deal with irregular expenditure or writing it off without investigation. She referred to the question on capacitation, and said that skills were needed across the board -- it was about employing the right people and continually capacitating them.

She stressed that political will was a key factor.

She said Treasury monitored unspent infrastructure grants, with some municipalities being asked to return money. She noted that delayed payments were common, often leading contractors to abandon projects, causing further delays. When money was returned and needed to be reissued, it had a dire impact. There were often delayed payments in local government, and it was the norm not to achieve the 30-day payment requirement. She pointed out that the metros' average payout time was months.

She said that COGTA had to agree with the appointment of a municipal manager, and the Department performed an oversight role in the recruitment process.

Ms Muller said that AGSA’s reports highlighted best practices, but said there was a reluctance to engage the Western Cape to share best practices, pointing out that it was not only the Western Cape that had clean audits and good practices. Lessons could be learnt from many different municipalities.

She clarified that in 2019, when AGSA was granted additional powers, they had started in nine municipalities and now applied to all municipalities. This power could be used more to have a greater impact. She said that other institutions like the NCOP needed to also take note of material irregularities.

She agreed with Mr Britz that the situation was deteriorating, and that unqualified audits needed to be problematised. She noted that service delivery and financial management were low in the municipalities. Better training needed to be given to employees. She emphasised the need to look at behaviour and to change the culture.

Regarding the use of consultants, she clarified that there was a list of consultants that had been shared with National Treasury and the SA Institute of Chartered Accountants. She said that in the case of a bad consultant, they would be referred to the Special Investigating Unit (SIU) for investigation.

She said that a municipality's audit action plan had to be tabled by the council. While it was a good starting point, the oversight aspect could be improved. She said the action plan had resulted in an improvement in financial management, and the aim was to have it better address performance information, compliance, infrastructure and service delivery.

She explained that COGTA and Treasury had issued Circular 88 with guidelines. The circular had to be adopted by the council, or they did not have to abide by it. She also explained that COGTA and Treasury were trying to make it more user-friendly and applicable across municipalities.

She added that she could share the list of municipalities where grant money was spent for other purposes with the Committee. She highlighted that the Free State had many cases of this nature in the past year.

The meeting was adjourned.