Municipal Financial Statements & Budgets: briefings by North West & Chris Hani District Municipality

Finance Select Committee
06 June 2007
MUNICIPAL FINANCIAL STATEMENTS AND BUDGETS: BRIEFINGS BY NORTH WEST AND CHRIS HANI DISTRICT MUNICIPALITY

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

Documents handed out:
North West presentation
Chris Hani presentation
Chris Hani District Municipality Budget (Annexure A)
MFMA Implementation Plan (Annexure B)
Action Plan on Audit Report Findings (Annexure C)
Chris Hani District Municipality IDP 2007-2008 (Annexure D)
Chris Hani District Municipality Report to the Portfolio Committee

Audio Recording of the Meeting Part1 and Part2

SUMMARY
Members of the Committee met with the North West province and the Chris Hani District Municipality in order to discuss the municipal financial statements and budgets. The presentations outlined financial status of the municipalities, the development projects, and the budget processes, level of service delivery, the challenges faced and the support programmes.

In their discussion with the Northwest there were a number of issues raised, and the Chairperson ruled that the situation in the North West was very critical. He stated that he would not allow the Provincial Treasury to respond to any of the questions asked and that they should instead kindly go back to provinces and do things correctly, in conjunction with National Treasury.

A whole range of issues was also discussed with Chris Hani District Municipality, and the most prominent was that of Eskom’s role in the implementation of service delivery. The Chairperson stated that a number of issues raised by members would once again be raised when the Committee next deals with Eskom. Municipalities would also be invited during the meeting with Eskom, so that they could raise their concerns.  Members also asked for clarity on whether the municipality invested public money in investment banks and also asked for comment regarding the relationship with the Development Bank of South Africa.

MINUTES
North West Presentation
The North West presentation was made by Mr. Ernst Van Wyk (Deputy Director General: Provincial Treasury) and Mr. Seymour Williams (Acting Chief Director: North West Provincial Treasury). The presentation outlined the financial status of the municipalities, the budget processes, the challenges faced and the support programmes. It was noted that there were many challenges that faced the municipalities. These included the need for continuous feedback to municipal managers and councillors, and the lack of holistic support. In terms of the financial status of the municipalities, there were 26 municipalities in the province and a majority of them had a poor revenue base. Many of the municipalities also had poor financial and administrative systems, and there were high levels of unemployment in certain areas. With regard to the budget processes budget assessments had been done on budgets submitted to Provincial Treasury, and the feedback provided to municipalities was based on the assessments. With regard to the support programmes, monthly reporting was done to the municipalities, and Provincial Treasury, provided training on the role and responsibilities of the municipalities.

Discussion
Mr Bernard Mokgabodi (Director: National Treasury) stated that he was concerned that some of the issues that had been raised at a previous meeting had not been attended to, and he said he was hoping to have a debate on some of the issues. Another concern was the structure and internal capacity problems. There seemed to be no commitment from provincial treasury to capacitate the right people with the right skills and also there seemed to be insufficient support given to municipalities. The North West presentation only provided information on 2 out of 3 district municipalities, and not enough information was provided on the expenditure of the equitable share.  With regard to the Municipal Infrastructure Grant (MIG), clarity was needed on how much had been spent to address backlogs in the North West. Finally Provincial Treasury should have asked National Treasury for help as all the issues had been raised before and nothing had been done about it.

Mr M Goeieman (ANC) [Northern Cape] stated that these allegations against Provincial Treasury were very surprising because they were supposed to assist the municipalities. National Treasury should have also come to aid them sooner and it was a pity that only two districts were called into account. The presentation did not give clarity on the meaning of limited or no revenue base, and the presentation gave an indication that some municipalities were still struggling, and vague indications were given about financial status of municipalities. With regard to municipal expenditure on salaries, a percentage needed to be given so that there could be a better understanding of the situation. Although page seven of the presentation gave an indication of the budget process of municipalities, clarity still was needed on how the process affected the municipalities.  There also needed to be an indication on Treasury's role in assisting municipalities, the length of time it would take to address capacity issues, and into why municipalities invested when they were struggling.

The Chairperson said that the problem was that an optimistic report was invariably given about municipalities during the oversight visits, but nothing was done to address the challenges.

Mr D Botha (ANC) [Limpopo] stated that there were high levels of unemployment in certain areas; however nothing was spent due to a lack of capacity. It was also becoming increasingly clear that municipalities still spent more on bonuses and salaries. The Committee would like to state that no one should be entitled to a bonus when his or her municipality had not spent the infrastructure funding.  Clarity should be provided on the link between Treasury and local government with regard to the Integrated Development Plans (IDP) and the budget. If there was no co-operation between the Departments the Treasury should withhold funds due to the lack of expenditure. National Treasury should also state whether they received the reports, and whether people were sent out to assist the local governments.

The Chairperson noted that large amounts of money were paid to municipalities that continuously had failed to perform.
 
Mr E Sogoni (ANC) [Gauteng] said that what worried the Committee were the issues that were raised behind closed doors that had not been addressed, and clarity should be provided on exactly what those issues were.  There had been mention that capacity had been touched upon by National Treasury, and details should be provided on what was being done to deal with the demands of the Medium Term Expenditure Framework (MTEF). Looking at audit reports of other municipalities, details needed to be provided on which were the high-performing municipalities in the North West.

The Chairperson ruled that the situation in the North West was very critical. He stated that he would not allow the Provincial Treasury to respond to any of the questions asked, but that they should kindly go back to provinces and do things correctly, together with National Treasury. The service delivery process needed to be taken seriously, and therefore Provincial Treasury needed to provide a comprehensive report, and a list of issues must be sent to the Committee in writing.

Mr Vincent Malepa (Director: National Treasury) stated that he would feel very uneasy if there was an impression left in the Committee that National Treasury had done nothing to support the province.

The Chairperson stated that the Committee has taken into account that National Treasury did all they could to assist.

Mr Botha said that the Department of Local Government should be a part of the process, and a time frame for the readiness of the report should be given.

The Chairperson stated that so much still needed to be done, and the deadline in which the report should be tabled was within the next quarter. Provincial Treasury should also bring in their colleagues from Local Government when next they appeared before the Committee.

Mr. Van Wyk responded that it was the first time that Provincial Treasury had had to present on the municipalities, and he only took over the issue recently.

Mr Goeieman stated that it was accepted that a major problem was the newness of the team, but agreed with the Chairperson and urged Provincial Treasury should go back and do some correct work.

Ms Sasha Poggenpoel, Researcher, Financial and Fiscal Commission, asked for clarity on the criteria that were used to group the municipalities, and information should be provided on how well the municipalities were doing in terms of the collection of revenue.

Mr Williams replied that the provinces' classification was not the same as the National Treasuries classification. The province looked at key issues that determined financial sustainability and viability, and one of the criteria was the capacity to collect own revenue. The amounts were determined on a month-to-month basis, in which municipalities struggled to pay for salaries and municipalities were sometimes bailed out by the equitable share.

The Chairperson stated that great assistance needed to be provided to poor municipalities, and stakeholders should be called in to see into how they could ensure that poor municipalities were capacitated, as far as revenue was concerned.

Chris Hani District Municipality Presentation
Mr Mafuza Sigabi, Executive Mayor, Chris Hani Municipality, gave a presentation that outlined the profile of the District, the various development projects, the municipal budget, Municipal Finance Management Act (MFMA) compliance, level of service delivery and the capacity constraints. He said that there were 8 municipalities in the Eastern Cape and Chris Hani was the third largest district municipality. In terms of the MFMA compliance, 12 urgent priorities were achieved ahead of schedule, and the municipality was ahead on most targets while some targets were still being addressed. In terms of service delivery a total of R150million was required for the eradication of buckets. Some of the challenges included corporate governance issues, public participation and intergovernmental relations.

Discussion
Mr Goeieman commended the mayor on a comprehensive report, and stated that the report should have focused on the infrastructure grant. The mayor should provide clarity on what he meant when he stated that the municipality had received a bad audit report.  With regard to the presentation it was important to note that the total population in the booklet and the total population in the Powerpoint presentation did not correspond, and comment should be provided on the municipalities’ relationship with Eskom. With regard to the water board scheme, clarity should be provided on how the ordinary person would benefit in terms of free basic services. Finally the mayor should comment on the municipalities’ relationship with Development Bank of South Africa (DBSA).

Mr Sigabi responded that the bad audit report referred to the disclaimer that was received from the Auditor General. With regard to the infrastructure grant the municipality welcomed the comments that have been made. In terms of free basic services, there was an allocation from the general expenses, which made it easier for people to benefit on free basic services. The allocation from the general expenses was used for maintenance and out of the allocation people from the villages were contracted to do the work.

The Chairperson stated that the allocations from general expenses needed to be used correctly

Mr Mokgabodi added that there were many things not done correctly. National Treasury had undertaken various workshops in order to address the matter.

Mr Sogoni requested that National treasury provide a list of trained municipalities.

Mr Goeieman stated that the issue at hand was that people were not benefiting from free basic services.

Mr Mpilo Mbabiso, Municipal Manager, Chris Hani District Municipality, replied that he DBSA loan was made out of the realisation that the various municipal targets were not going to be met, and therefore some initiatives had to be taken. The loan was also partly due to the fact that the funds for sanitation from the Department of Water and Forestry had been exhausted.
 
The Chairperson stated that the Committee needed to check on the matter

Mr. Goeieman asked for clarity on how the R10 million issue had been serviced.
 
Mr Johannes Vorster, CFO, Chris Hani District Municipality, replied that the intention of the servicing of the loan was meant to improve the collection services of the municipality

Mr Botha asked for comment regarding the issue of investments, and on the Regional Services Council (RSC) levies in the municipalities. It had also been discovered that there were no wards in certain municipalities and he asked then for clarity on how elections could take place. He asked that the mayor should provide details on why expenditure in certain municipalities was low and also comment on the functions of the audit committees.

Mr Sigabi replied that in terms of the wards, the area in question was an urban area, which has developed mechanisms and structures that were meant to create or improve public participation. With regard to the audit committee recommendations it was only a few people who did not respond to the issues raised, and not whole municipalities.

Ms A Mchunu (IFP) [Kwazulu Natal] asked for clarity around the issue of public participation, and the various challenges faced in terms of the water supply. The mayor had stated in his presentation that there were needs that superseded the budget and clarity should be provided on whether the needs were as a result of under budgeting.

Mr Sigabi replied that in terms of public participation, one could argue that the current allocations did not work in terms of participation, and therefore it was necessary to look at ways of improving public participation. With regard to the waterborne and water shortage issues, there needed to be an examination of other technological services in the waterborne area. Currently there was a failure to convince people that there were other technologies they could use, and the municipality was looking for other alternative sources.  The various water schemes that were referred to in the presentation were the ones for village communities. Information regarding the names of the villages and the challenges could be provided at a later stage.

The Chairperson stated that the information should be provided in writing

Mr Mbabiso added that in rural areas there were more than 400 water schemes and in those areas everyone was receiving free water.

The Chairperson stated that free basic services should be more than just providing water. Information should also be provided on how people would receive basic electricity and other important services.

The Chairperson asked for clarity regarding the R42 million shortfalls on bucket eradication. He also asked for comment on the issue of capital projects funded by the Municipal Infrastructure Grant (MIG), and also whether the mayor has any special projects. Salaries seemed to be a problem as it was usually the highest expense in terms of the municipal budgets. With regard to Eskom, clarity needed to be provided on whether Eskom was giving monthly reports and aligning its services with those in the IDPs.

Mr Sigabi replied that figures provided were incorrect and needed to be updated, and that there was no shortfall in the bucket eradication. With regard to the salaries and the budget it was important to note that the salaries were within the limits required.  With regard to the discretionary funds Council donated a small amount of money to non governmental organisations (NGO’s.)

The Chairperson ruled that the issue of discretionary funds was an irregular practice, and should be stopped immediately. He stated that each and every fund should relate to a programme so that oversight could be performed.

Mr Mbabiso replied that in terms of the MIG, it was important to note that the MIG was still new to local municipalities and there had been various problems with the implementation of funds

The Chairperson added that the MIG was not so new as it had been around for a while. The big issue was the underperformance of the funds.

Mr Mbabiso clarified that it was the first time that local municipalities were receiving direct transfers of the MIG.

The Chairperson said that the matter would be raised with the Department of Local Government.

Mr Mokgabodi stated that according to his calculation salaries accounted for at least 42% of the budget

Mr Sigabi stated that the jump in figures was due to the fact that many of the posts that were not previously filled had been filled now, and also there were additional funds contributed by Treasury, which led to the inflation of the figures.

Mr Mbabiso stated that in terms of investments, funds were allocated by National Treasury, and the interest earned was out of the grant funding.

Mr Goeieman stated that the issue lay close to investment and it was still incorrectly handled.

Mr Mokgabodi asked the mayor to state whether grants were going into the bank accounts of municipalities or were going to investment banks.

Mr Sigabi replied that the funds went into a primary account.

The Chairperson stated that the issues were very serious. Municipalities applied for funding because funding was needed, and the question of what was happening to the money was a very serious matter and must be resolved as soon as possible. The Committee had previously not been asking about the interest accrued

Mr Vorster stated that the grants were allocated in the primary bank account of the municipality.

Mr Mokgabodi also raised concern about the issue of Eskom, and asked the mayor to comment on the financing of dilapidated infrastructure. With regard to the replacement of RSC levies he asked for clarity on whether the correct figures were provided to national treasury.

Mr Sigabi replied that on the issue of Eskom the municipality had been engaging with Eskom, and detailed information was available in the report provided (see document). Eskom was currently in the process of rolling out free basic energy. There was alignment with the IDP, and soon Eskom would have its own way of developing matters, and the municipality did not receive monthly reports from Eskom.

The Chairperson stated that if Eskom developed its own way of doing things then they would not be complying and would be breaching the Division of Revenue Act.

Mr Malepa stated that the municipalities were funding a number of projects for small, medium and micro enterprises (SMME), and asked that clarity should be provided on how many jobs had been created through these projects.

Mr Sigabi stated that it was difficult to state how many people were employed, but that this information could be made available at a later stage.

The Chairperson requested the information to be sent in writing.

The Chairperson asked the Mayor to comment on the tariff structure of the municipalities, and on how high the tariffs were for the new financial year. Clarity should also be provided on whether the municipality was investing money elsewhere, also whether the performance contracts had been signed, and when the audit fees owed would be paid.

Mr Sigabi replied that there were no tariffs in district municipalities and tariffs only existed in local municipalities. The local municipalities usually requested an increase in tariffs and the district municipality usually agreed. The district municipality did not owe any audit fees, and the Committee might be referring to another municipality. All the performance contracts had been signed.  In terms of Investments, he confirmed that there were currently no investments; however the issue would be flagged.

Mr Eddie Rakabe, Financial and Fiscal Commission, asked the mayor to state the sort of information the municipality had with regard to the equitable share

Mr Sigabi replied that in terms of the equitable share, there was a geographic information services, which was the main tool being used. The municipality usually identified and focused on the areas where service delivery took place and it was working very well.

Mr Mbabiso stated that in terms of the MFMA implementation, it was important to note that implementation was ahead of the target dates, and all the dates had been provided.

The Chairperson asked for clarity on why there was a late allocation of funds

Mr Mzimasi Mangcotywa, Deputy Director General, Department of Local Government & Traditional Affairs, Eastern Cape, stated that the late allocation arose as a result of an unfortunate situation, and when it was gazetted, it also happened that the inaccurate figures were included as allocations.

Mr Mokgabodi asked whether the allocations of grants to municipalities were done timeously.

Mr Sigabi replied that the allocations were made timeously

Mr Goeieman stated that there needed to be a clear indication of how municipalities were catering for the poor.

The Chairperson stated that there were many issues raised during the discussions, which would be raised again when the Committee next dealt with Eskom. Municipalities would also be invited during the meeting with Eskom, so that they could raise their concerns.

The meeting was adjourned.