Municipal Financial Statements & Budgets: Provincial Treasuries and Departments of Local Government

NCOP Finance

04 June 2007
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Meeting report

FINANCE SELECT COMMITTEE

Finance Select Committee
05 June 2007
MUNICIPAL FINANCIAL STATEMENTS & BUDGETS: PROVINCIAL TREASURIES AND DEPARTMENTS OF LOCAL GOVERNMENT

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

Documents handed out:
Western Cape Presentation
Gauteng Presentation
Mpumalanga’s Presentation

Financial Status of Municipalities: Mpumalanga presentation

SUMMARY
Members of the Committee met with the MEC’s and representatives from the Provincial Treasuries, and the Department of Local Government of Western Cape, Gauteng and Mpumalanga. The provincial presentations outlined the Municipal Budgeting process, Financial Performance & Budget Process for the 2006/07 financial year, the  Auditor General findings, the challenges, remedial action plans and the way forward.

The Committee commended the Western Cape on its report, and stated that it would confine itself to consideration of the few items identified by the Auditor General, and not take the discussion wider. Members asked for clarity of salaries, and stated that it was necessary to examine whether salaries accounted for the highest expenditure in the municipalities. Members also asked for comment on the assistance given to municipalities in order to compile the outstanding reports

Members asked Gauteng to comment on the issue of municipal debtors, and stated that they were concerned with financial performance of certain municipalities. Members felt that there was a lack of communication within the municipalities, and asked provincial treasury to state what was being done to improve capacity within the municipalities.

Discussions with Mpumalanga largely focused on the budgeting process and members asked for clarity regarding the approval of annual budgets, and whether the municipalities submitted their annual budgets on time Members also asked the Department to comment on what was meant by their reference to delegated powers. They further sought clarity on the projects that were under Project Consolidate, and also whether the less fortunate municipalities were clustered with those that performed better.

MINUTES
Western Cape Presentation
The Western Cape was represented by Ms Lynn Brown (MEC: Finance), Mr. Richard Dyantyi (MEC: Housing and Local Government), Ms Shanaaz Majiet (HOD: Housing and Local Government) and Dr Johan Stegman (Head: Provincial Treasury). The presentation outlined the Municipal Budgeting process, the consideration of the Auditor General findings and the way forward. The province noted that the Auditor General’s report for 2005/06 had found that there were instances of fruitless and wasteful expenditure, budgetary issues, unauthorised expenditure, and issues unresolved from prior year audits in many of the municipalities. The municipal budget process was assisted and monitored through the Local Government Medium Term Expenditure Committee (LGMTEC). The LGMTEC looked at the state of municipalities and discovered that the majority of municipalities had  an infrastructure delivery strategy, but limited revenue to execute their plans. In order to address the challenges the LGMTEC has made a Cabinet submission on the state of the municipal budgets, and was currently implementing an action plan based on the findings by the Auditor General and the LGMTEC.

Discussion
The Chairperson commended the province on their report, and stated that since there were very few issues of concern in the Auditor General's reports, he did not want members to look for other issues that were irrelevant to the discussion at hand. The biggest concern however was the issue of salaries and it was necessary to look at whether these accounted for the highest expenditures in the municipalities. Another area of concern was the high increases in tariffs in certain municipalities. This was a matter that had been raised by the Auditor General (AG) and it should be investigated.

Dr Stegman replied that in terms of the municipal salaries, Provincial Treasury would look at the budget of each and every municipality in order to pick up on trends and would look also at overtime in terms of salary increases. Capital expenditure was very low in the municipalities and Provincial Treasury was currently trying to get a hold on the backlogs in the provision of infrastructure, such as water sourcing and electricity consumption. With regard to the high tariff increases, he noted that if a municipality would stick to its projected inflation rate, then it would be able to adequately deal with backlogs.

Mr M Robertson (ANC) [Eastern Cape] asked the Treasury to state whether it was giving municipalities money when it knew that they had no capacity.

Mr Stegman responded that there had been a general improvement in the financial management of municipalities and that Provincial Treasury was quite pleased about the improvement. With regard to transfers, there was a process implemented to track transfers in order to stop financial dumping to the municipalities. Treasury had instituted training programmes with municipalities, in order to address the matter.

Mr D Botha (ANC) [Limpopo] said that there had been some good work done in the Western Cape towards resolving problems. The biggest challenge however still was the implementation of policy and the monitoring of the processes.

Mr E Sogoni (ANC) [Gauteng] stated that the objective of the meeting was to focus on issues of coordination. The Committee understood that implementation of the Municipal Finance Management Act (MFMA)was easier than the Provincial Finance Manangement Act (PFMA), but there needed to be strong focus on issues such as the oversight reports in municipalities. With regard to the Auditor General’s report, Provincial Treasury should comment on the assistance given to municipalities in order to compile their outstanding reports. Finally he said the Department of Local Government and Provincial Treasury needed to look at lessons that could be learned from the various provinces, in order to determine the way forward.

Mr Dyanti responded that there needed to be an improvement and the process would help the Department to pick up on various issues. There were, however, many challenges and it was important to note that not all governments worked well with municipalities. With regards to the oversight reports, it was important to note that the municipalities were now taking charge of the oversight reports, and the Department was also looking at ways of improving the system, and welcomed the fact that something was happening. In terms of the Auditor General's report the Department had come through a month-long process with municipalities, in order to address the problems. However, there was still some political instability in the municipalities, which slowed down the development processes.

Dr Stegman added that most of the AG's issues related to pure accounting issues, and there were various reasons that led to municipalities receiving a qualified report. Provincial Treasury had instituted training programmes with the municipalities in order to prevent the late submission of reports, and also to assist with the finalisation of the financial statements.

Ms Brown stated that the major issue was that the process was still very young, and there needed to be processes where all the departments and municipal leaders were placed in the same position in order to focus and speedily address the challenges.

Gauteng Presentation
The Gauteng presentation was given by Ms Nomfundo Tshabalala (HOD: Provincial Treasury), Mr Oupa Seabi (HOD: Local Government) Mr Zack Khan (Department of Local Government), and Ms Karabo Nkosi (Provincial Treasury). The presentation outlined the Municipal make-up for Gauteng Province, joint roles and responsibilities in line with the Municipal Legal Framework, financial performance & budget process for the 2006/07 financial year, and the plan for the 2007/08 financial year. The presenters indicated that the Department of Local Government (DLG) historically engaged with municipalities on matters regarding governance and finance, in order to try to achieve functional and sustainable local government, and also to support municipalities where there were capacity and institutional constraints. During the financial year significant progress had been made towards developing a provincial framework for monitoring municipal performance, and also towards the implementation of a support programme for the Province aimed at strengthening the technical and financial management capacity of municipalities. It was important to note that all municipalities in general adhered to time frames as set out in the MFMA, in terms of the budget process. In those few instances of non compliance, a letter was sent to the Municipal Manager.

Discussion
Mr. Robertson asked the Department to comment on the issue of municipal debtors in certain municipalities

Mr Seabi replied that it was discovered that there were some dysfunctional municipalities and Department had to intervene. The issue was simply a case of collapsed systems and everything was now under control.

Mr Botha stated that he was concerned with financial performance of certain municipalities, and asked the Department to comment on the matter.

Ms Tshabalala responded that the level of spending in some municipalities was concerning. There had been interventions by Provincial Treasury, which was hoping to see results in the near future.

Mr Sogoni said that the issue of expenditure on capital needed to be looked at. With regards to the Integrated Development Plans (IDPs) it was interesting to see that there was a lack of communication within the municipalities, and the Provincial Treasury should state what was being done to improve capacity within the municipalities. Finally the South African Local Government Association (SALGA) should be commended for playing such a positive role.

Ms Tshabalala responded that that the level of spending in both Departments needed to be looked at and that she was hopeful results would begin to show once the process had begun. With regard to the Auditor General's concerns it was important to indicate that the metros were still the responsibility of the National Treasury, but that Provincial Treasury was supporting municipalities that were not delegated. Credibility of budget was a critical aspect of the quality and assumptions of the various budgets.
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Mr Seabi noted that the Department could now assure the Committee that municipalities were now planning and implementing various projects with each other. There was also a concern that Capital Expenditure (CAPEX) was low in municipalities, but members could be assured that the Department was engaging with municipalities on the matter.

The Chairperson stated that the last slide presented, and the issues surrounding Division of Revenue Act (DORA) allocations in the budget were issues that the two departments needed to focus on, and to determine ways in which issues of financial viability could be dealt with.

Mpumalanga Presentation
The Department’s presentation was made by Ms Elsie Coleman (MEC) and Mr. Rabeng Tshukudu (HOD). The presentation provided an outline of the IDP review, the publication of annual budgets, the approval of budgets, challenges and remedial action. The biggest challenge was that some municipalities did not follow the budget schedule of key deadlines which was tabled in Council by 31 August 2006, which then resulted in late tabling of Integrated Development Plans and draft budgets. The Department had decided to take remedial action by informing the municipalities that the scheduling of key deadlines should be tabled in Council by  31 August of each financial year and the Council and administration should strictly adhere to these timelines. Provincial Treasury had agreed to provide training and continuously monitor the IDP and budget process in order to ensure alignment and compliance.

Discussions
Mr Sogoni stated that there needed to be better co-ordination within provinces, and that also clarity should be provided on the delegated powers of municipalities, the utilisation of the grants in the building of capacity, and whether Provincial Treasury believed that municipalities would be able to schedule budgets on time.

Ms Coleman stated that she received a report from the Minister of Local Government requesting information on municipalities that were under performing in terms of municipal grants for infrastructure. The letter was forwarded to the municipalities and some did not respond on time. Those Municipalities had their grants withheld, and there had been various meetings with municipalities on the matter, and hopefully this would bear fruit at the end of the year. With regard to the delegated municipalities, the Minister delegated at a lower level, and this meant that the Provincial Treasury had the power to administer the books of the municipalities in order to assist with financial management issues.

A Local Government representative stated that the low spending on grants was a result of low capacity. The Department had gone in and tendered technical expertise, which would be placed in the municipalities. Hopefully this would assist municipalities in spending their grants, and would also assist in the fast tracking of the various projects.

Mr Botha asked for clarity regarding the approval of annual budgets, and whether the municipalities submitted their annual budgets on time. The issue of grants was worrying and needed to be looked at, and Provincial Treasury was asked to state whether any assistance was provided to municipalities in formulating IDPs.

Ms Coleman responded that Provincial Treasury was trying to adopt a model so that they could assist at municipal level, and hopefully by the end of financial year all municipalities would have tabled their budgets.

Ms A Mchunu (IFP) [KZN] asked for clarity on how many municipalities were under Project Consolidate, and whether the less fortunate municipalities were clustered with those that performed better.

The Chairperson asked Provincial Treasury to comment on the issue of skills, which was a recurring question.

The Local Government representative stated that all municipalities were receiving attention through Project Consolidate; in terms of which the initiative was to go to municipalities and address the concerns raised for each by the Auditor General.  Municipalities had also been clustered in such a way that the Department could identify the various shortfalls of the municipalities so that assistance could be provided when needed.

The Chairperson stated that a serious discussion must be held with the Development Bank of South Africa (DBSA) in order to address the issues arising from Project Consolidate. Provincial Treasury should also make sure that the DBSA took a more hands-on approach to such matters.

Mr. Botha asked for clarity regarding the low spending in some municipalities and asked whether  there were any roll-overs.

The Chairperson responded that the municipalities were under performing, therefore the funds were withheld.

Mr Bernard Mokgabi, Director: National Treasury, stated that great strides had been made in the municipalities, however the presentations by Mpumalanga did not indicate anything about the quality of budgets. Another improvement was to be seen in how the municipalities had been capacitated, and they should be commended on this.

Mr Vincent Malepa,Director: National Treasury, said that out of the engagements with the Western Cape, only one municipality failed to table its budgets on time. There was however a need to prioritise the use of resources in the municipalities, and a need to appropriate funds properly for long term projects.

The meeting was adjourned.

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