Municipal Financial Statements & Municipal Budgets: briefings by Auditor General, Provincial Treasuries, KZN Department of Local

Finance Select Committee
30 May 2007
MUNICIPAL FINANCIAL STATEMENTS AND MUNICIPAL BUDGETS: BRIEFINGS BY AUDITOR GENERAL, PROVINCIAL TREASURIES, KZN DEPARTMENT OF LOCAL GOVERNMENT

Chairperson: T S Ralane (ANC) [Free State]

Documents handed out:
Audit Status of Municipalities
Eastern Cape Provincial Treasury presentation
KwaZulu Natal Provincial Treasury presentation
KwaZulu Natal Local Government presentation

SUMMARY
Members of the Committee met with the Auditor General and Accountant General and with ,the Provincial Treasuries of KwaZulu Natal and The Eastern Cape, as well as the KwaZulu Natal Department of Local Government. The Auditor General’s presentation provided an overview of the accounting frameworks, submissions of municipal financial statements, the completion of audits, municipal debts and outstanding audit fees. The provincial presentations outlined the assessments of 2007/08 budgets, provided a summary of municipal budgets, the generic Challenges, and proposed Interventions. 

In their discussion with the Auditor General members asked for clarity on whether all municipalities had submitted their reports, and the various roles of National Treasury and Department of  Local Government. Members also asked the Auditor general to comment on how it was possible for a municipality to attain five disclaimers and how municipalities were assisted in the removal of debt.

The discussion with the Eastern Cape largely focused on the relationship between municipalities, Departments of Provincial and Local Government and Provincial Treasuries. Members also sought clarity into why some municipal budgets did not reflect total allocations to the relevant municipalities in terms of the Division of Revenue Act (DORA), and also asked for clarity on the budget allocated to certain municipalities.

Due to time constraints Members were unable to engage fully with the KwaZulu Natal presentations, however there was a brief discussion on the issue of municipal rates.

MINUTES
Presentation by the Auditor General
Mr Terence Nombembe (Auditor General) and Mr Freeman Nomvalo (Accountant General) gave an overview of the accounting frameworks, submission of municipal financial statements, the completion of audits, municipal debts and outstanding audit fees.  It was reported that submissions of financial statements had increased dramatically from 25% to 45% during the 2005/06 financial year. During the previous financial year no municipality received a clean unqualified audit, and 31% of municipalities received a qualified audit with a disclaimer. The total number of outstanding audit fees was R60.7million as of 30 April 2007, and the Eastern Cape had the highest number of outstanding audit fees, whereas the Western Cape had the least number of outsanding audit fees.

Discussion
The Chairperson noted that there had been substantial improvement in the situation from 2000 to date and this was to be applauded. The Auditor General was asked about those municipalities who did not have audit opinions and action needed to be taken with regard to the municipalities who had failed to submit financial statements for the 2005/06 financial year.

Mr Nombembe replied that all the relevant information would be forwarded to the Committee.

Mr M Robertson (ANC, Eastern Cape)  asked for clarity with regard  to the submission of reports and whether all municipalities had submitted their reports

Mr Nombembe replied that all information from all the Municipalities had already been submitted. The office of the Auditor General was currently busy with the auditing process.

Mr B Mkhaliphi (ANC) [Mpumalanga] noted the comments made by the Auditor General (AG), and assured him that the report would be used for oversight and constituency work. Although the municipalities had onerous requirements, he asked Mr Nombembe to comment on whether these were used as an excuse for municipalities to perform minimally. There was also a matter of contention that the South African accounting processes were too complex for a developmental government, and he asked for comment from the AG also on this issue.

Mr Nombembe replied that some of the accrual accounting standards did have requirements which needed to be met and there were some challenges. In order to account to the standards required, some municipalities would take a considerable time to find all the relevant information, and throughout all the years that they were still getting the information in order they would be receiving a qualified audit due to technicalities. In order to fully address the challenges all role players, such as National Treasury, Provincial Treasury and the Department of Local Government, needed to play a bigger role in assisting the municipalities.

Mr Nomvalo added that the point the AG was making was that there were certain aspects of reporting that could pose some challenges to municipalities, and those challenges usually took a long time to resolve.  Sometimes the use of the current argument may give municipalities an excuse, and this too was an area that required urgent attention.

Mr E Sogoni (ANC) [Gauteng] stated that an issue from the report was the various roles of national treasury and Department of Provincial and Local Government (DPLG) and he asked the AG to comment on any possible overlaps and conflicts. With regard to the National Treasury, the issue of migration to new standards was meant to take place over three years, and the Auditor General should comment on whether there was going to be an extension on the migration. He also asked for comment on how the negative perceptions of municipalities could be turned around, and why audit fees were not paid by the municipalities. He commented further that the issue of municipal entities was re-emerging into the debates, and he asked for clarity on whether the municipalities that were applying for deregistration no longer operated

Mr Nombembe replied that National Treasury (NT) had the power to solve the accounting problems, but it was powerless in solving the management problems in municipalities. With regard to the outstanding audit fees, the matter had been dealt with, and the solution of fee collection had to be done on a sustainable basis. Many other options were being looked at. In terms of the deregistration of municipalities, the Auditor General's role was to audit what was there so he had no control  whether the municipality should or should not register. 

Mr Nomvalo added that NT issued the rules and gave clarification to them. During the past year, NT had given financial management grants to municipalities. Some used it and others did not use it in a proper manner. In some municipalities there were roving advisors who came in to make recommendations, and this was a good initiative. Forums had been established in order to discuss the challenges faced, and the improvement of service delivery.

Mr M Goeieman (ANC)[Northern Cape]  asked for clarity on how it was possible for a municipality to attain five disclaimers, and also how municipalities could be assisted in the removal of debt. With regard to the graph on audit opinions, there was an increase in the disclaimers, and the Auditor General should provide clarity on what the reason would be for the increase.

Mr Nombembe replied that it was possible for municipalities to have repetitive disclaimers, if nothing was being done about those disclaimers. A disclaimer meant that there was not enough information for the AG to express an opinion on the financial statements, and was a very serious issue. The information provided related to only 55% of the audited municipalities. The Auditor General’s reporting was meant to identify the underlying reasons for the trends.  The removal of debt was an accounting issue that needed to be looked at, and if the challenge was highly prevalent in municipalities, NT needed to come in and assist with the matter.

Mr Nomvalo added that it was very difficult to get to a situation where debt could be completely be written off, due to the fact that the issues were service delivery issues.. A sustainable solution needed to be found, and this would also have to be one that did not send the wrong message. There was ongoing interaction with the municipalities in order to determine the way forward. With regard to the disclaimers, he noted that disclaimers were bad for municipalities and should be looked at in terms of the risk imposed from a governance point of view. The major problem in municipalities remained the lack of basic controls.

Mr D Botha (ANC) [Limpopo] said that the provincial treasuries did not play a strong enough role in assisting the municipalites. Clarity was needed on the role of the internal audit committees. Comment should be provided on the process of attaining full time councillors in the low capacity municipalities and how this was progressing.

Mr Nombembe replied that with regard to the skills issue, there were different solutions. The AG's role was to identify and define what the problem was. Once the problem had been defined, some of the solutions would require political decisions and some would require administrative decisions. 

Mr Nomvalo added that internal audit processes were an important aspect of the auditing process, often faced by major challenges. These included the short supply of skills, and there needed to be a shared resource between municipalities. Many issues arising from political matters also had an effect on the internal auditing processes.

The Chairperson stated that the Committee would from now on be focusing on municipalities and would be requiring the assistance of the Auditor General and Mr Nomvalo..

Eastern Cape Provincial Treasury Presentation
Mr William Nel (MEC: finance), Mr A Magalela, and Mr Q Kalimashe, both  Directors of : Provincial Treasury, Eastern Cape, gave a prsentation that outlined the legal framework of the Department, the assessments of 2007/08 budgets, generic challenges, a summary of municipal budgets, and proposed interventions. They noted that under the legal framework the Mayor of a Municipality was required to consult the relevant Provincial Treasury and, when requested to do so, the National Treasury in preparing the annual budget. In most cases budgets were not often supported by attachments and documentation required by the Municipal Finance Management Act (MFMA), and some budgets did not reflect the total allocations to the relevant municipality in terms of the Division of Revenue Act (DORA). In order to address the challenges Provincial Treasury would continue to build capacity for effective monitoring function and would continue to make arrangements for it to take active participation in the budget formulation process. Provincial Treasury would also promote participation by relevant departments in the formulation of municipal Integrated Development Plans..

Discussion
Mr Mkhalipi asked for clarity relating to the high vacancy rate, and also stated that decisive action need to be taken in the issue of IDPs. In terms of the financial management grant, Provincial Treasury should provide clarity on whether the targeted municipalities made use of the service.

Mr Kalimashe responded that the Provincial Treasury response to the challenges faced by the municipalities was due to the high vacancy rate. Provincial Treasury hads begun to fill the empty posts and had now begun to put monitoring mechanisms in place.  There had been many interventions when it came to the financial management grant, and the pourpose was to asses why some of the funds were not bearing fruit. Provincial Treasury suspected that the necessary infrastructures were lacking in the municipalities, hence the misuse of services. 

Mr Sogoni asked Provincial Treasury to comment on the actions taken in terms of performing oversight on municipalities, and also on the relationship between Provincial Treasury and Government. He noted the observations by the Provincial Treasurer on page four and in particular the observation that some budgets did not reflect total allocations to the relevant municipalities in terms of the Division of Revenue Act (DORA).; comment should be made on the matter. Clarity should be provided by Provincial Treasur He asked for further clarity on this matter, and also on what was meant by the statements that interventions will be made by the relevant Departments. With regard to the Auditior General’s report, it was clear that many municipalities did not submit their reports on time, and he asked Provincial Treasury to report on that further.

Mr Kalimashe said that the interventions by the provincial departments had been assessed and found not to be adequate. The Departments did not confront municipalities on the costs of implementing programmes and the rendering of services. Provincial Treasury was beginning to highlight the issues and was pushing for stricter monitoring over provincial departments. With regard to the non-compliant municipalities, Provincial Treasury did not have the specifics at this stage, but noted that there were major challenges in the municipalities.

Mr Magalela responded that the Department was implored to effect the necessary recommendations that were made, and had implemented mechanisms to make sure that the recommendations are implemented.

The Chairperson stated that Provincial Treasury was taking an initiative and should be commended.

Mr Robertson asked the Department for clarity on the budget allocated to certain municipalities.

Mr Nel replied that there were 22 municipalities that had financial challenges in that their income was insufficient to cover the running costs. Provincial Treasury however was looking at ways to assist and was also planning on performing an audit of municipal trust accounts.

Mr Botha stated that the report said that 38 of the municipalities had been identified as having the same problems, therefore clarity should be provided on how the IDPs were drawn up and whether local government identified the same problems.

Mr Kalimashe responded that mostly the drafting of the IDPs had been found to be good, but the plans were not reflected in the budgets. There was a lot of work that needed still to be done, but with support from the local government the IDPs would be strengthened. It had been also found that the provincial departments failed to send the correct delegations to public hearings.

The Chairperson asked the DPLG to comment on how they planned to outdo the provincial treasuries contribution to municipalities.

A representative from the DPLG stated that municipalities did certainly have a problem with revenue. It was important to note that some municipalities were really struggling.

KwaZulu Natal Treasury Briefing
Mr M Magagula, Senior General Manager: KwaZulu Natal Treasury, and Mr F Cassimjen, General Manager: Municipal Budget, undertook the presentation, which outlined the province’s budget performance for the 2006/07 financial year, the Municipal 3rd Quarterly Report, an assessment and Report of Supply Chain Management, Conditional Grants, challenges and interventions made. It was stated that that Provincial Treasury was only required to report on 18 high and medium capacity municipalities. As from 01 July 2007, however, 59 delegated municipalities would be required to be reported on and monitored on a monthly basis.  Provincial Treasury would also like to commend the 22 low capacity municipalities, identified and tabled in the slides, who had shown initiative and started reporting earlier than the legislative mandates. There was still a concern about some high and medium capacity municipalities who had failed to report. Some of the challenges included the need to support small business development and faster job creation within the municipalities, and also the need to attract both national and foreign capital investment.

Kwa Zulu Natal Local Government Briefing
Miss H Krishnan, Department of Local Government KwaZulu Natal, focused on issues such as capacity, annual reports, disclosure and remuneration, challenges faced and the level of  Departmental support. She said that in terms of addressing the capacity issue the new legislative and policy environment was not sufficient to ensure transformation, and there needed to be a greater focus on the improvement of skills, systems and knowledge.  Some of the challenges faced by many of the municipalities included the transfer of functions, and lack of uniform performance measures and standards for functionaries and councils. In order to address these challenges the Department provided hands on support on various projects such as Project Consolidate and Siyenza Manje.. The Department also provided Councils with  training on governance and oversight, and support in implementation of the Municipal Property Rates Act
 
Discussion
The Chairperson asked Provincial Treasury to comment on the issue of rates.

Mr Magalula stated that he noted the point made by the Chairperson and various interventions had been made to municipalities to relook at the budgets. A report on the succeses would be forwarded to Members of the Committee. 

A representative from the Eastern Cape Department of Local Government asked for clarity regarding the high tarrifs in KwaZulu Natal so that a comparison could be made.

The Chairperson responded that there was no clear-cut issue on what the benchmark was and so the inflationary target of 3% to 6% was being used. The issue of prices was also critical and the Provincial Treasuries should try by all means to find a way around the matter. Service delivery issues by municipal managers were still critical and needed to be monitored.

The meeting was adjourned