Municipalities’ Financial Status & Budget Processes: briefings by Auditor-General & Treasury

FINANCE SELECT COMMITTEE
9 JUNE 2006
AUDITOR-GENERAL & TREASURY: MUNICIPALITIES’ FINANCIAL STATUS & BUDGET PROCESSES: BRIEFINGS

Chairperson: Mr T Ralane (ANC Free State)

Documents handed out:
Auditor-General’s Presentation
National Treasury Presentation

SUMMARY
The Auditor-General said that there had been some legislative reforms to enhance transformation and improve service delivery. These included the Local Government Municipal Demarcation Act; the Local Government Municipal Structures Act; the Local Government Municipal Systems Act; the Local Government Municipal Property Act and the Municipal Financial Management Act. Unfortunately the municipalities used three different sets of accounting standards and the Auditor-General’s office and the treasury were struggling to get them to use one.

Some of the transversal issues that the top 50 municipalities reported on were asset management; debtors; personal expenditure; internal audits; unauthorised expenditure and other internal control issues. On average, 59% of municipalities’ debts still had to be recovered. The total provision was R11.4 billion (out of 19.2 billion) with Johannesburg having to still recover R7,2 billion.

The treasury said that the Municipal Financial Management Act compelled treasury to publish the 2003/04 and 2004/05 audit outcomes for all municipalities and status of any outstanding AFS and audits. It had to publish a list of municipalities not compliant with timelines for 2005/06 submissions and encourage proactive support for improvements. Treasury’s implementation priorities included making improvements in the Service Development Budget Implementation Plan; improving in-year reporting and publishing out-turns; finalising supporting regulations and guides; validation of training material and building capacity.

MINUTES
Auditor-General’s Presentation
Auditor-General (AG) Fakie began by providing background information on the status of municipalities. There were 284 municipalities. There were also 77 municipal entities, and 20 of them had to prepare consolidated financial statements (FS). There had been some legislative reforms to enhance transformation and improve service delivery. These included the Local Government (LG) Municipal Demarcation Act; the LG Municipal Structures Act; the LG Municipal Systems Act; the LG Municipal Property Act and the Municipal Financial Management Act (MFMA).

Unfortunately the municipalities used three different sets of accounting standards and the AGs office and the treasury were struggling to get them to use only one. Absolute ordinances had to be repealed to enable a coherent legal framework. There were also some macro challenges. The availability of legislation did not automatically lead to better service delivery. It was only a means to an end. The rate of urbanisation was rapid and there was inadequate and deteriorating infrastructure.

National Treasury had its own classification of municipalities. There were 50 High Capacity Municipalities, 107 Medium Capacity ones and 127 Low Capacity Municipalities. AG then analysed and audited the top 50 municipalities to get a picture of what was happening in the lower rated ones.

In 2004, before the MFMA came into force, 17 municipalities (6%) had submitted their FS by the end of August (which was the AG’s preferred submission date). A further 83 (29%) submitted by the end of September. Then a further 144 (51%) submitted after September with 40 (14%) not submitting by the end April 2005. Over the same period 25 (50%) of the top 50 had submitted by end of September, 23 (46%) by the end of April and 2 (4%) had not submitted by the end April 2005.

As at 30 June 2005 (the period when the MFMA was in force), 133 (47%) municipalities had submitted by the end of August. Between April and March 2006/07 124 (44%) more submitted their FS and 27 (9%) were still outstanding as at March 2006. Only 95 of 284 audits had been finalised by the end April 2005, mainly as a result of the late FS submissions. Only 23 of the top 50 audits had been finalised by the end April 2005, with 58 (61%) being qualified (a bad opinion), 3 (3%) being awarded disclaimers (extremely bad opinion) and ten (11%) getting adverse opinions (the worst possible opinion).

Some of the transversal issues that the top 50 reported on were asset management; debtors; personal expenditure; internal audits; unauthorised expenditure and other internal control issues. The AG then analysed areas such as the debt collection periods, the municipalities’ provisions for bad debt and their liquidity.

For debt collection, 23 of the top 50 municipalities had an average collection period of 136 days. The debtors owed a total of R19.2 billion. Nine municipalities collected within 100 days, and 14 took longer than 100 days. The average provision for bad debt was 59%. That is, on average, 59% of municipalities’ debts still had to be recovered. The total provision was R11.4 billion (out of 19.2 billion) with Johannesburg having to still recover R7,2 billion.

Only 22 of the top 50 had had a Performance Audit done. This was unfortunate as more emphasis was needed on performance management to determine if service delivery was really being achieved. To encourage service delivery, accountability arrangements had to be improved and capacity to improve the municipalities’ financial positions had to be developed.

National Treasury Presentation
Mr T Pillay, Chief Director, Local Government-National Treasury, began by describing the requirements imposed on the treasury by the MFMA with regards to the Audited Financial Statements (AFS) of municipalities. Treasury had to publish the 2003/04 and 2004/05 audit outcomes for all municipalities and status of any outstanding AFS and audits. It had to publish a list of municipalities not compliant with timelines for 2005/06 submissions and encourage proactive support for improvements.

The MFMA was helpful in that it laid out the steps to be followed for budgeting. There had to be planning; strategising; preparing; tabling; approving and finalising. To further assist in, and to remind municipalities of their tasks, circular 31 was issued on the 10^th of March 2006. It was meant to raise awareness and caution about exemptions. It contained reminders of processes; timelines; requirements; the tabling and adoption dates and listed the criteria with respect of credibility, funding, linking plans and budgets.

More assistance was provided to provincial municipalities by having national workshops with provinces and selected municipalities in 2005 and 2006. There was support given for the budget preparation processes, reviews and evaluations of budget documents, content and quality checks and reviews of resource allocations, tariffs and other commitments.

Treasury’s implementation priorities included making improvements in the Service Development Budget Implementation Plan; improving in-year reporting and publishing out-turns; finalising supporting regulations and guides; validation of training material and building capacity.

Discussion
Mr B Mkhaliphi (ANC Mpumalanga) said that at times it seemed as though there was no real co-operation between municipalities and the treasury. This was very worrying. In the future the Committee wanted information about how long it took for the municipalities to settle their own debts with bulk suppliers of water and electricity for instance.

Mr Fakie replied that the MFMA was explicit on how long the municipalities had to repay their debts (30 days).

Mr Z Kolweni (ANC North West) asked why the bad debt figure (R11.4 billion) was so high. Were treasury and the AG happy with the systems in place relating to how this debt was managed?

Mr Fakie said that the AG’s job was to look for serious transgressions within municipalities but when their debtors took 130 days to repay them it led to liquidity problems within the local authorities. Some municipalities then secured long-term loans to help assuage their short-term cash-flow problems, which was never the ideal scenario.
 
Mr E Sogoni (ANC Gauteng) said that it would be useful if the Committee was given municipalities’ quarterly reports to look at in the future. What was being done to align the three different accounting systems? Were there municipalities that repeatedly submitted their reports late? Did the AG attend any of treasury’s workshops for municipalities to get an idea of the AG’s reporting requirements? How long would it take to fully phase in the MFMA?

Mr Fakie replied that his office did furnish Parliament with municipalities’ quarterly reports and they were currently available on their website. The different accounting systems did give them problems but they also had to be realistic about the availability of capacity to use one modern system. There was a plan to get all municipalities to migrate to one system. There were some municipalities that were habitually tardy but the number had been coming down as many of the municipalities got rid of their reporting backlogs. How many municipalities were given exemptions about when they had to submit their reports?

Mr Pillay said that the treasury invited people who would benefit most from their workshops to the training. However, not everyone came and issues such as the location of the workshops were an issue here. If competency levels were to be raised, more test-based training was needed. The speed at which more capacity was built would determine how long the MFMA took to be phased in. For example, it would take about five to ten years before treasury’s graduate interns would be in charge of the whole process.

He said 158 municipalities had been given exemptions the previous year as it was the first time they were required to do so. More were asking for exemptions but it would not be allowed this time. Sometimes the costs of sophisticated accounting systems were prohibitive. For example, the Western Cape’s system cost about R300 million while Gauteng’s cost R200 million. These systems may be difficult to apply to the whole country, and in any case, the system would be no good without the right people to use it.
 
The meeting was adjourned.