Mangaung Municipalities: briefings

NCOP Finance

17 September 2007
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Meeting Summary

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Meeting report

FINANCE SELECT COMMITTEE
18 September 2007
FREE STATE MUNICIPALITIES: BRIEFINGS

Chairperson: Mr T Ralane (ANC, Free State)

Documents handed out:

Mangaung Municipality briefing document
Matjhabeng Local Municipality briefing document
Mangaung Municipality Tariffs
Mangaung Municipality: Integrated Development Plan
Mangaung Council: Annual Oversight Committee Report
Motheo District Municipality briefing
Special Adjustments Appropriation Bill (2007/08 Financial year)

Audio recording of meeting

SUMMARY
The Committee continued with its task of engaging with municipal officials and checking the work of municipalities in the provinces.

The Committee questioned Mangaung Municipality on the amounts owed, interventions to recover amounts owing and the apparent conflict between the municipality borrowing and investing at the same time. Spending on salaries, and amounts owing by councillors and officials were specifically raised. Members queried whether it was a core function of municipalities to make loans and investments, why there had been under spending, the apparent lack of supervision by Councillors, and the impact of all deficiencies upon the service delivery to the people of Mangaung. It was stressed that service to the people was the primary task of all employees. Particular questions were asked on the deviations from the Supply Chain Management system, adherence to the Municipal Finance Management Act, underperformance, the unacceptably high non-collection of debt, and
lack of full co-operation from officials. Members felt that the budgeting and spending were not strictly in accordance with the legislative requirements. National Treasury expressed its concern that the Municipality had little to show for the amounts spent, and that the excuses of Regional Service Council levy phasing out was not valid, since the grants that had replaced those levies were underspent. National Treasury was prepared to assist, but required assurance from the Municipalities that they would perform satisfactorily. Provincial Treasury pointed out that it had undertaken extensive training, provided model documents and had explained the process of applying for exemptions, but had received little response from municipalities. IT was agreed that the Committee must engage again with this municipality.

Matjhabeng Local Municipality had experienced problems with its CFO in the past, and the third Acting Chief Financial Officer in a year had been appointed. Specific questions directed to this municipality concerned the underspending, capacity to handle money and development, and failure to comply with the legislation. It was suggested that the Committee perhaps needed to visit the municipality to see how it was operating on a day to day basis.

Motheo District Municipality was questioned on its apparent failure to properly apply policies and procedures, and its use of discretionary funds. Once again the problem of failure to administer grants was raised. Members queried an investment with New Republic Bank, which had to be written off, and asked on what basis the investment had been made and who had authorised it, queried a loan from the Development Bank, and noted that since the municipality's sole source of revenue was grants, there appeared to be no need for loans. Salaries and bonuses were of concern, and the municipality was asked why it did not employ interns. The Committee criticised the fact that the Municipality would insist upon payment to itself, but in turn not pay its own debts.
It stressed that the legislation was clear and unambiguous, and must be followed to the letter. Municipalities should need to appear before the Committee only to report formally, and all audits should be unqualified. Municipalities should be attending to both service delivery and capacity building for the future. There was a problem of commitment by the officials.

National Treasury briefed the Committee on the Special Adjustments Appropriation Bill (2007/08 Financial Year). The Committee was unhappy with additional appropriations to Denel and the Pebble Bed Modular Reactor (Department of Public Enterprises), but agreed with the appropriations in respect of the 2010 Soccer World Cup.

MINUTES
Opening remarks
The Chairperson note that the task of the Committee included engaging with all the Provincial Officials of municipalities in order to ensure that the municipalities were not failing in their duty to deliver services. The system should not merely react to crises, but should be more proactive and prevent crises. The Constitution and the other relevant legislation pertaining to Municipalities was clear about the duties and functions of all the management teams, and set out Parliamentary oversight, Government Direction, provincial support and direction and the role of the Municipal Management. The Committee's experiences with the Eastern Cape municipalities showed a general decline in efficiency and delivery, even with some high-quality municipalities. The improvement would take robust discussion and action. Municipalities needed to become stronger. This could be achieved by insisting that they draw, achieve and comply with budgets. This meeting would cover discussion over a whole range of subjects, to ensure that municipalities would not decline, but instead become more efficient and deliver services to the end users.

Mangaung Municipality Briefing
Councillor M Moilwa, Deputy Executive Mayor, Mangaung Municipality thanked the Chairperson for the opportunity to present the case for Mangaung. No oral presentation was made but instead the written presentation was handed out to Members. Briefly, this document reflected the total budgeted income as R1.8 million for 2007/08, rising to R2.02 million in 2009/10. The document summarised the main income sources, and operating expenditure and capital budgets. The main infrastructure projects were summarised. The financial status was set out, and it was noted that the 2004/05 and 2005/06 audit reports had been qualified. The qualifications related to incomplete asset registers, escalation of debtors, and lack of compliance to the Generally Recognised Accounting Practices (GRAP). The presentation went on to list loans, investments, and income and expenditure on grants and subsidies. Risks were listed as an increase in debtors, deviations on the Supply Chain Management Policy, spending correctly, escalating 2010 expenditure, shortage of resources, and lack of organisational service standards. The collaborative efforts were described. The performance in respect of the grants was set out, together with the challenges, and the steps aimed at meeting those challenges. It was noted that structured and systematic processes for integrated development planning (IDP) was in place.

Discussion
Mr M Robertson (ANC, Eastern Cape) addressed the indebtedness to the Municipality and enquired what constituted the global figure of debt. In particular he wished to know what amounts were owed to the Municipality by the National and Provincial Governments and what interventions were being made to recover such amounts. He added that there seemed to be an unwillingness on the part of Municipal officials to do something about getting payments, and if municipal officials were unwilling to do their work how were they justifying their monthly salaries.

A Member of the Committee asked how the IDP figures were computed and questioned whether there was not overlap with other projects.

He questioned the apparent discrepancy of the Municipality investing funds, yet also seemingly borrowing because it allegedly did not have funds to meets its commitments. He queried also why there was reflection of outstanding loans owed to the Municipality but no mention of interest.

He noted the reference to R5 million spending on salaries and wished to have the assurance that all Councillors and Officials had repaid their debts, whether for services, rates or loans to the
Municipality.

Mr D Botha (ANC, Limpopo) wished to know whether it was the core function of municipalities, as defined in the relevant legislation, to be making loans and investments. He wondered about the contribution to service delivery for the end users, including the poorest of the poor. He noted that the Auditor General (AG) had remarked upon lack of an appropriate asset register and noted that outside consultants had been engaged to perform a function that the Municipality itself should be doing. He wished to know whether Treasury had set up any guidelines and if so, what support or training was available to meet such guidelines.

The Chairperson stated that the impression created was that there simply was no order in the Municipality.

The Chairperson added that the presentation listed a grant of R28 million and expenditure against it of R19 million. Another instance mentioned a grant of R23 million and expenditure against that of R4 million. This meant that R30 million from grants was unspent, and he enquired the reasons. He feared that this related either to insufficient capacity, or incapacity to do the jobs for which the officials were hired, and which the Councillors were elected and paid to supervise.

The Chairperson then noted that the risks included an increase in debtors, deviations from the Supply Chain Management (SCM) processes, the lack of spending of budget allocations according to the IDP, and the non completion of capital projects timeously, which were then carried over into the suspense account. Further risks were named as escalating personnel costs and the lack of organisational standards. He was concerned how these deficiencies impacted upon the people of Mangaung..

The Chairperson stressed that service to the people was the prime task and the reason for existence of employees, whether officials or Councillors. Their main function was to accelerate the infrastructure and social service delivery by the Municipality. The report showed no real benefit accruing to the people of Mangaung. There was neither clarity, nor justification, nor even logic in what was being reported.

The Chairperson asked for frank clarification of the what deviations from the Supply Chain Management system there had been, and why.

A member wished to know why, if there was adherence to the provisions of the Municipal Finance Management Act (MFMA) debt was seemingly not recovered.

The Chairperson felt that National Treasury should begin asking questions. He asked pointedly whether the Municipality was aware of the legislative requirements. He asked why it was underperforming while the costs of infrastructure were escalating.

An official of the Mangaung Municipality agreed that the purpose of the Municipality as to better the lives of the people of Mangaung, and admitted that the infrastructure was poor and needed to be improved. He noted that there was a distinction between capital and operating budgets and claimed that 88% of the capital budget provisions had been implemented. In regard to supply chain management, it said that deviations did not necessarily amount to fraud or corruption and that although attempts had been made to prevent such deviations, these were not always successful. He agreed that in the short term the bad debt situation was untenable, but was of the opinion that a Municipality always had to make provision for bad debt, as the people could not be expected to make a contribution to the expenses. He noted that bad debts by Councillors were within the limits allowed by the law, and that arrangements had been made regarding the repayment of such debts at only 20% per annum. This had been agreed to by other Councillors.

The Chairperson stated that private enterprise would not be satisfied with such an approach, and that there had to be consultation with all stakeholders - both public and private. Work was needed on those figures.

Mr E Sogoni (ANC, Gauteng) questioned the Municipal Infrastructure Grant (MIG), noting that this had not been registered. He hoped registration was planned. He also hoped this would not lead to problems with labour at the lower level.

Mr Sogoni stated that with regard to the budgets, he wanted responsibility and accountability at the highest levels. He felt that there must be re-examination of the roles. He felt that the most important question was how the budgeted impact upon the ordinary citizen and he was struggling to reconcile the report with this question.

A Member pointed out that there was an unacceptably high non-collection of debt. He noted that central government had provided funding, and he wished to know how this had been recovered by the National or Provincial Governments. The Committee had been engaging with other Municipalities for the past month, and had been unable to receive acceptable answers. The Department of Public Works had been attempting to explain matters, and it was not clear where responsibilities lay. The problem was compounded by the National and Provincial Governments operating in different cycles.

He continued that the Municipality received grants, but failed to spend R91 million. There were cash deposits of R70 million, but the Municipality's creditors had been paid late, which impacted upon the cash flow of those creditors. Perhaps the Creditors were anticipating late payment and building this fact into their quotations; if so everybody was losing through late payments. The people were not receiving the expected and needed services. Businesses of creditors were placed in financial jeopardy. National Treasury would not receive tax from businesses forced out of operation through tardiness of municipal officials. All impacted upon service delivery to the people. He commented further that the low rate of interest on loans did not ensure value for money.

A municipal official responded that salary costs were a problem. The Municipality would be comparing the staffing establishment with the payroll, but it had achieved capping of salaries. He stated that Councillors’ debt was not a problem.

A Member then pointed out that the debt provision was R185 million, and he enquired what portion of that was debt owed by the Councillors.

An official stated that Corporate Services did not have the figures, but that they would be produced by Internal Audit. He explained that the suspense account encompassed payments received from debtors who had failed to identify themselves sufficiently clearly for the payments to be appropriated to the correct account. At one time the total amounted to R34 million, but ABSA Bank was investigating all the original payment documents, and had managed to produce details that enabled the sum to be reduced considerably. It was hoped that as payments were identified and transferred to the correct destination account, the amount of bad debt would be reduced considerably.

The official added that in terms of Section 71 of the MFMA, the Municipality was reporting to Treasury monthly. He added that although a computerised accounting system was being utilised there was also a manual system currently being maintained. He agreed that meeting performance and coming up with a scorecard was very difficult. He explained that an amount of R6 million in the presentation was from the Department of Provincial and Local Government. The restructuring grant funding varied greatly and about R19.1 million had been spent.

A member expressed unhappiness about the lack of full co-operation from Officials. After an interchange between Members, Chairperson and officials, it was spelt out specifically by the Chairperson that Members not only had a right but a duty to oversee the Municipalities and that it was essential to determine how the budget and the performance by the Municipality was impacting upon the residents within the Municipality.

A Member expressed the opinion that the provision of housing was a priority. He noted that the spending on the capital budget was not achieved, and that the responses to his questions had not been clear and helpful.

Mr Robertson felt the question of the short term debt had not been adequately addressed in terms of the MFMA. He enquired if the debt would be brought to acceptable limits in 2008. He further enquired if there would, in future, be timeous reporting to the National and Provincial Treasuries.

Mr C van Rooyen (ANC, Free State) remarked that his impression was that there had been innovative budgeting not strictly in accordance with the existing directives, and he enquired when there would be adherence to the directives. He noted that "other expenditure" amounted to 10% of the budget and he wished to have clarification on this. Furthermore he noted that the restructuring grant required achievement of certain objectives, which would include reduction of the debt. If this was not done, then the audit reports would be qualified.

Mr Botha (ANC) said that he did not understand the interest. On page 11 there was reference to R64 million of the grants not being spent. In the current year another R91 million was not spent. These sums must be repaid to National Treasury.

The Chairperson asked for a specific comment, bearing in mind the legislative provisions.

A Municipality official said that he believed that the issue of interest had been spelt out and that the Council itself instructed the City Manager whether it was intended to make or receive a loan.

Another official added that the organogram had not been included in the presentation, but this could be produced if necessary.

The Chairperson said it would not be necessary.

The Municipality official then stated that the current budget process was attempting to identify the intended beneficiaries of sanitation, and place such items in the operational budget. Supply Chain Management procedures were being escalated, and there was an attempt to improve compliance. The policy on interest had been firmed up. There was an indigent policy, which had changed since 2000, and since October 2003 there had been measures introduced to comply with directives.

The Chairperson stated that the Committee was not so concerned with short term debt or overdraft, but that long term debt was problematic. At the same time he was trying to work out the logic or having an investment policy, as the two concepts were contradictory. In July 2007 there was income of R100 million, but expenditure of only R80 million. He was concerned that there seemed to be a pattern of not expending monies in order to invest, in the belief that it was more profitable to invest. He was puzzled by the ratios, and the collection rate, which would hopefully improve. However, the main problem was gearing, for there was R17.5 million encumbrances against assets of R210 million. He was concerned about these ratios and wanted them changed in the budget for 2007/2008 to more conventional ratios.

Mr William Ramphele Senior Manger, Department of Provincial and Local Government (DPLG), said that the operations and capacity of the Municipality were low and needed attention. Audits were costly, and the auditors were repeating the same comments every year, showing that there was no progress. Additionally, the Municipality had applied for exemption, but had not shown what efforts were being made to comply. He believed that the problem lay with the operating budget not providing for services and facilities that were required by the inhabitants of Mangaung.

Mr Vincent Malepa, Director: Local Government budgets, National Treasury, said that he had listened very carefully to the questions posed by the Members and the answers from the officials. He noted that public money was at stake. Mangaung Municipality, despite its failures, was still regarded as one of the three best performing municipalities, but there was little to show for the expenditure of public money. There was reference to the phasing out of the Regional Services Council (RSC) levies and the consequent cash problems, but he pointed out that these levies had been phased out a long time ago. They were replaced by grants. Over the previous three years only a portion of the grants had been successfully expended. Initially National Treasury had withheld R20 million of the grants, but this had not assisted the poorest citizens. National Treasury was prepared to assist, but required assurance from the Municipality that it would perform satisfactorily. The Public Finance Management Act principles had been effective since 2001, and Mangaung was a member of the pilot PMFA project; it was therefore not unreasonable to expect that Mangaung would have less difficulties than other Municipalities in conforming to the legislative requirements. Mangaung had received R50 million and for two years had done nothing with this money. The former CFO had proved obstructionist and had given very little co-operation, and this was regarded as the chief cause of the current problem. He had now been appointed as the debt collector consultant. National Treasury could not see the logic in this. The draft budget from Mangaung had been analysed and found not to provide for or be consistent with the IDP provisions. It had been sent back for further attention to remedy the defects. Nothing had been returned, and so the draft budget had to be reworked once again. He conceded that some Municipalities, including Mangaung, were achieving well, but not were communicating such achievements to their inhabitants.

The Chairperson noted that the legislation provided not only for delivery of services but also for capacity building, which included skills development among the staff of the Municipalities.

Ms A S Fourie, SEM: Financial Governance, Free State Provincial Treasury, pointed out that the Provincial Treasury sent officials to the various Municipalities to train Municipal officials. Efforts included risk management, where models were submitted. The municipalities were asked whether there was clear understanding, and had also sent through processes for exemptions. Despite this, the Municipalities were not responding.

The Chairperson confirmed that the Committee was aware that the previous CFO had been obstructive. The legislation was quite clear and there was no room for individual idiosyncratic interpretations of the requirements.

Mr B Taye, current Chief Financial Officer, Mangaung Local Municipality, assured Members of his fullest co-operation and undertook to pull the Municipality together as it should be operating.

The Chairperson suggested that there should be further engagement with this Municipality shortly.

Matjhabeng Local Municipality Briefing
Mr L de Bruyn, Acting Chief Financial Officer, Matjhabeng Local Municipality, stated that the difficulties of the past were well known. The former CFO's disciplinary enquiry was proceeding, and should be resolved within the year. He added that he was the third Acting CFO to be appointed within a year.

Mr de Bruyn tabled a full briefing document. This set out the budgeted revenue and actual revenue for July 2006 to June 2007. Expenditure was budgeted at R786 million, but achieved at R574 million, a variation of 27%, explained on the available cash flow. The capital budget and expenditure were listed. A summary was also included for the period July to August 2007. Grants, reports to Provincial Treasury and capacity constraints were also included in the presentation.

Mr de Bruyn explained that this Municipality was working hard at reducing the amount of bad debt of R900 million and had recovered 60%. He stated that the chief problem was capacity and capacity building, and that attention was directed to remedying these two deficiencies. In this regard it as felt that training was a partial answer to the problem, and a percentage of the budget was now directed to this end. He conceded that the challenges were high but felt that satisfactory progress was being made in meeting and overcoming the challenges.

Discussion
Mr van Rooyen said that there seemed to be a trend of municipalities not spending their funds, indicating that they were not performing adequately, but nevertheless asking for more money.

The Chairperson concurred and said that a municipality would request funding, but the figures might reveal that only 78% of the grants were spent. This meant that they had not even been able to spend the initial amounts requested. He felt that there was a problem and the answer must be disclosed. The Committee was being told that capacity was not a problem, nor was planning. He therefore wished to know why the problems continued, and why there were payments to contractors to do the work assigned to municipalities.

Mr de Bruyn conceded the underspending, but added that the Special Investigations Unit had an investigation underway and hopefully such instances would not be repeated.

Mr Sogoni asked whether there was the capacity to handle both the money and the development for it is not clear whether there was a plan.

The Chairperson said that the municipality was clearly not in compliance with the letter of the law, and that it appeared to be in severe difficulties. He suggested that the Committee perhaps needed to conduct an inspection in loco, to meet the CFO and see how he operated on a daily basis. Provincial Treasuries had clearly indicated their willingness to assist, despite the fact that there had been lack of cooperation from the various municipalities in the past. The Provincial Treasuries were clearly concerned to prevent the problems that were prevalent in the Eastern Cape province. He wanted help to be given to all municipalities across the board, but the Committee must be aware that the problem that the problem was huge and widespread.

Motheo District Municipality Briefing
Mr Joseph Erasmus, Member of Executive Mayoral Committee (Corporate Policy), Motheo District Municipality, tabled a document describing the budgets and financial status, and audit outcomes, noting that there were qualifications for the 2004/05 and 2005/06 financial years. The document listed the risks, loans, compliance and investments, including one investment that would have to be written off. The document also listed the capital expenditure of R31 million, and operational and personnel expenditure, noting that there were 140 employees and 45 councillors. The spending and performance on conditional grants was set out. The document also described the Local Government Finance Grant, noting that R215 000 was unspent. R534 000 was spent on improving financial systems. The MFMA was being implemented and progress reports were submitted to provincial and national treasury regularly. The district municipality was assisting local municipalities in the administration of Municipal Infrastructure Grant (MIG) projects. It was noted that Motheo was rated as a low-capacity municipality.

Discussion
The Chairperson summarised that the main problem seemed to relate to proper application of policies and procedures and properly qualified CFO’s.

Mr Erasmus responded that the Motheo District Municipality had a discretionary fund.

The Chairperson emphasised that it was precisely from such funds that most of the problems emanated. Special or discretionary funds created their own "animals" which tended to make off with the money.

Mr Botha asked when the RSC levies had been replaced by grants, for it seemed to him that neither the old RSC levies nor the replacing grants were being properly administered. He added that the District Councils were designed to assist the municipalities within their jurisdiction, and he could not see any mention of this function anywhere in the report.

Mr van Rooyen referred to the New Republic Bank, which, according to his information, was a small bank in Gauteng. He asked who had authorised the investment with it and why nothing was being done to recover the money invested, and now written off. He also sought clarification regarding assistance to the Municipalities.

Mr Sogoni wished to know whether Motheo District Municipality had a revenue base and whether there were any guidelines concerning investments.

Mr Botha remarked upon the danger of taking loans, that had to be repaid, and noted that there were instances of municipalities not having the cash flow to repay their loans, in which case they would simply expect the fiscus to bail them out.

Mr Sogoni remarked that the Municipality had taken a R50 million loan from the Development Bank of South Africa (DBSA) for electrification and sanitation, and he wished to have comment upon what the legislation had to say about the four capital projects financed by the National Government

The Chairperson asked why the DBSA was approached for funding relating to National programmes, and asked if this approach was approved anywhere. He noted that the Municipality's only source of income was grants, and enquired why then there was a need for loans. It seemed to be pleading poverty on one hand and unnecessarily borrowing on the other, which was not logical. He stressed again that the function of the Municipalities was to deliver services, not to engage in investments or enter the financial markets by making loans.

Mr Botha said that he was concerned about the salaries and bonuses, especially the bonuses, which he understood should be payments for meritorious work, but which seem to be paid as a matter of course, at a time when the Municipality was in a parlous financial position. He also referred to the investment in the New Republic Bank, and wished to know what research had been done before this investment had been made, and who were the parties involved in deciding to make such investment.

Mr Sogoni asked why the Municipality was not employing interns, when there was a large pool of unemployed graduates who badly need the work experience to further their careers.

Mr Erasmus answered that the New Republic Bank was now insolvent, and the Liquidators had indicated that there was little chance of any money being recovered. He said that such investment had been made before his employment, and he could not give the reasons for it. He added that the Municipality did not have a revenue base, but was dependent upon grants. There were guidelines for rendering assistance to local municipalities, but some of these municipalities could not even pay their own staff. The district municipality was trying to assist here.

An official from the Municipality explained that payments had been received, without sufficient identification to allow them to be credited to the proper account/s, and these were then transferred to a suspense account until they could be identified and transferred across. This system had affected their ability to pay VAT to South African Revenue Services (SARS), but once the payments were identified the VAT components could be paid to SARS, and had in fact been paid over. At present there were no outstanding claims by SARS in respect of VAT

The Chairperson said that it appeared to him that the Municipality was not setting a good example by not paying its accounts, but insisting on being paid itself. He felt that there should be consistency all round.

The Chairperson said that there should be no compromise on delivery which was the main function of Municipalities. If need be, the Treasuries were available to assist with advice, guidance and training. The legislation was clear and unambiguous, and must be followed to the letter. Municipalities should need to appear before the Committee only to report formally, and all audits should be unqualified. In addition to delivery of services the Municipalities should be attending to capacity building for the future. Despite repeated calls for service delivery there was no change of attitude and character among the Municipalities, which he viewed with great concern. He felt that the problem was one of commitment by the officials.

Special Adjustments Appropriation Bill: Briefing by National Treasury
Ms Jo-Ann Ferreira, Director, Legislative Services, briefed the Committee on the Special Adjustments Appropriation Bill (2007/8 Financial Year). She noted that this Bill contained provision for appropriation of additional funding for the requirements of Sport and Recreation South Africa, and for the Departments of Agriculture, Communications, and Public Enterprises.

Discussion
Members noted that they were unhappy about further advances to Denel and the Pebble Bed Modular Reactor (Department of Public Enterprises) but expressed their gratitude that the 2010 World Soccer Cup payments to municipalities were being increased, as the municipalities were accelerating the necessary work
.
The meeting was adjourned.


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