Free State Municipalities Financial Performance & Budgets; Co-Operative Banks Bill [B13B-2007]: briefing & adoption

NCOP Finance

18 September 2007
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Meeting Summary

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Meeting report

FINANCE SELECT COMMITTEE
19 September 2007
FREE STATE MUNICIPALITIES FINANCIAL PERFORMANCE AND BUDGETS; CO-OPERATIVE BANKS BILL [B13B-2007]: BRIEFING AND ADOPTION

Chairperson:
Mr T Ralane (ANC, Free State)

Documents handed out:
Ngwathe Municipality: Briefing
Moqhaka Municipality Briefing by Executive Mayor
Moqhaka Municipality 2005/06 Annual Report
Dihlabeng Local Municipality: Briefing [Part1][Part2] [Part3] [Part4] [Part5] & [Part6]
Nala Municipality Revenue and Expenditure Report as at 31/08/07
Setsoto Local Municipality: Briefing
Co-operative Banks Bill, 2007. Presentation to Select Committee on Finance
National Treasury’s Response to Submissions on the Co-Operative Banks Bill
Co-Operative Banks Bill [B 13B-2007]

SUMMARY

The Ngwathe Municipality had an operating budget of R211 million and a capital budget of R76 million for the 2007/08 financial year. Challenges faced included the under recovery of electricity costs due to illegal connections and an increasing burden of subsidies to indigent people. Increases in tariffs and salaries were in accordance with inflation. Government subsidies and grants would finance the bulk of capital expenditure. A loan had been negotiated. The ratio of assets to liabilities was constant from the previous year but the ratio of debt had increased which made funding problematic. The salary component of operating expenditure had decreased slightly to 32.5%. A net loss of R13.7 million had been reported in the previous financial year. Of conditional grants, R35 million had already been transferred and R27 million spent. The municipality was putting systems in place to control spending and improve the competency level of staff.

Members raised serious concerns over the spending patterns of the municipality and general financial stability of Ngwathe, and found areas of concern in the report as well. It was felt that the municipality was more concerned with investments than service delivery. Provincial and national departments also criticised the report and the financial conduct of the municipality. Advice would be given and there would be more intervention with the municipality in an attempt to rectify their problems.

The National Treasury briefed the meeting on the Co-operative Banks Bill. There would be four types of banks, two at a primary level of service and then secondary and tertiary levels with more advanced functions. The South African Reserve Bank would be the supervisor for secondary and tertiary co-operative banks as well as primary banks with deposits in excess of R20 million. Other primary banks would fall under the Development Agency created in the Bill. A deposit insurance fund would be created and all banks would be compelled to take part in it. A Board would be appointed by the Minister of Finance, who would have the power to set regulations and exempt certain banks from the conditions of this and other Acts.

The Setsoto Municipality was a successful municipality in the Ficksburg area. The management team had remained unchanged during the last five years. It had managed to spend all of its conditional grants in the previous financial year, and in the financial year to date it had already spent R49 million of R73 million transferred with the balance having been invested. There was a public participation process for the budget but it was not well supported particularly in the predominantly white areas. There were a number of constraints. One of the major infrastructure projects was the Ficksburg dam.

Members were concerned that the municipality was looking to proceed on the water project alone. Other municipalities which would benefit should be involved, as well as provincial and national departments. Members were critical of the presentation, which was seen to be vague in places. Members were also concerned about the investments being made, but it was explained that this was a misnomer and all that was meant was that money for ongoing projects was put in a separate account to provide for the regular expenses. It was emphasised that municipalities should not be reliant on loans, and should budget to remain within their means.

The Moqhaka Municipality was spending 41.5% of its operating budget on salaries. Other expenditure was within the budget. There were no serious loans. One major problem was the under recovery on water expenses due to a lack of meters to measure consumption.

The Dihlabeng Local Municipality had an operating budget of R306 million. The budget was credible. A debt recovery plan was in place. A high proportion of expenditure was directed to the indigent population. There had been disclaimers on previous reports due to outstanding debts and poor control of assets, but these issues were being addressed. An internal audit unit was being put in place. There was an outstanding loan of R50.2 million. Investments had been used to finance capital projects.

The Nala Municipality had also received disclaimers. Funds were being spent on the eradication of the bucket system. The municipality was still not fully compliant with the Municipal Finance Management Act (MFMA).

Members criticised the municipalities, particularly Dihlabeng, for poor financial control. Several expenses were queried, especially the high proportion of salary expenses. It was emphasised that they must concentrate on service delivery as their core function, and all revenue should be channelled in that direction.

MINUTES

The Chairperson welcomed the delegations from the different Free State municipalities. He told them that the Committee wanted to hear about their areas of concern, as the Committee was responsible for correcting the troubled areas, and the good aspects would be self-evident. Some of the delegations which had appeared before the Committee the previous day had made glamorous presentations, and he urged them not to do the same. The Committee had its own specialists present. He reminded them that this would be an ongoing exercise.

Ngwathe Municipality presentation

Mr S Mofokeng (Acting Chief Financial Officer (CFO), Ngwathe Municipality) said that the Ngwathe Municipality had a total estimated operating expenditure budget for 2007/08 of R211 million. This excluded an expected surplus of R15 million, which would finance capital projects. The major components of the expenditure were R80 million for salaries (an increase of 8%), R36 million for electricity purchases (10% increase), R9 million for water purchases (21% increase), R2.5 million for chemicals, R18.2 million for indigent subsidies (25% increase), R17.2 million for repairs and maintenance (14% increase), R4.3 million for interest on loans, R3.4 million for fuel and oil and R2 million for poverty alleviation.

He said that there was a major challenge with electricity payments. The municipality purchased approximately R4 million of electricity from Eskom each month, but was only able to collect R3 million. Stealing of electricity was a major factor. Controls were being put in place such as log sheets to prevent the misuse of municipal vehicles. This would reduce the bill for fuel and oil. The number of people in need of the indigent subsidy had increased, and Ngwathe had problems in financing this. At present the municipality provided 6 kilolitres of water and 15 kilowatts of electricity for each household.

Mr Mofokeng presented a graph of the expenditure by vote. Bulk purchase of electricity (R46.8 million), Executive & Council (R42.2 million), Finance and Admin (R30.9 million) and Water (R21 million) were the major expenses. He noted the guideline that at least 5% of the budget should be dedicated to maintenance whereas the Ngwathe budget for this item was 8%. The biggest source of revenue was the sale of electricity. The municipality relied on government grants and subsidies to the tune of 29% of its budgeted income.

Mr Mofokeng then presented the capital budget for 2007/08. This amounted to R76 million (compared to R61.6 million the previous financial year (FY)). The major components were sanitation (R51 million, as opposed to R7.6 million the previous FY), roads (R2.7 million), water (R6.2 million), electricity (R3.8 million), cemeteries (R3 million), vehicles and machinery (R1.6 million) and institutional development (R5.5 million). In reality the municipality needed R86 million to finance the projects it wished to, so even the budgeted amount was insufficient. The capital budget was mainly sourced from contributions from national government which would cover 73% of the budget.

Mr Mofokeng then discussed the credibility of the budget. Increases were within National Treasury (NT) guidelines. The general tariff increase was 5.1% with smaller increases anticipated for the next two FY’s.

He said that one of the key budget areas was the development and implementation of a spatial development framework. Areas on which service delivery would be focused included sanitation, roads, water, electricity and refuse removal. A big water purification project was planned for Parys.

Mr Mofokeng reviewed the financial status during the 2006/07 FY. There had been a challenge of operating on an overdraft. This had decreased from R3.7 million to R3.2 million in 2007. It was planned to phase this out over three years. R40 million of debt was written off. The outstanding debt was still R92 million, a decrease from the R122 million the previous year. The total value of fixed assets had increased to R404 million. Currently Ngwathe had R2.20 in assets for every R1 of liability. The debt ratio of assets to debt had increased from 59% to 75%, which indicated how the level of debt had increased. This made it more difficult to obtain funding. The percentage of operating expenditure for salaries had decreased from 33.5% to 32.5%. During 2005/06 the municipality had suffered a loss of R572 thousand whereas the loss for 2006/07 was R13 million. The main problem lay in the funding of indigent people.

A new computer system had been implemented, which was Generally Accepted Municipal Accounting Standards (GAMAP/GRAP ) compliant. The billing system had been upgraded and controls had been enhanced. Tariffs had not been properly applied and there was a problem with meter readings, which had forced the municipality to use average readings. Controls had been introduced to manage cash and debt management systems, and on-the-job training was been given to staff to build capacity.

Mr Mofokeng said that one of the audit outcomes was that the fixed asset register was incomplete. Long term debtors could not be verified. There were weaknesses in the control framework for expenditure management as there were problems with the invoices. The municipal manager did not enforce the credit control and debt collection policies as no legal action was taken. This resulted in a high collection period of 267 days. Various steps had been taken to address this, including the establishment of a Debt Collection Unit, councillors and ward committees assisting in encouraging consumers to pay for services and a debt collection official dealing with outstanding monies from national and provincial departments. Policies were also being reviewed.

He said that there had been an increase in investments. The municipality had some loans. The loan with the Development Bank of South Africa (DBSA) had been restructured. Ngwathe had asked for another five years to pay it off, and this would reduce the repayments by R1 million in the new FY. The loan with INCA had been reduced from R28.2 million to R26.7 million.

Mr Mofokeng presented a detailed list of conditional grants which had been received, and the amount spent on the various projects. A total of R37.3 million had been allocated in these grants and of this R35.3 million had already been transferred. Of this, R27.3 million had been spent to date. He said there was a healthy relationship with NT and the Department of Provincial and Local Government (DPLG). The required reports had been sent but Ngwathe had not received feedback. There were good relationships with the various provincial departments. Timeous payments were made by the Department of Roads and Public Works, and regular meetings were held.

Mr Mofokeng said that five interns had been employed since 2004 to assist with the Financial Management Grant (FMG). He presented a list of various actions to be taken in terms of the MFMA to address a number of outstanding matters. Target dates were coupled to each matter. It would be a challenge to meet some of these dates, although some of them had been met. It was also a challenge to reconcile some of the monthly financial accounts. A consolidated report on withdrawals had to be submitted to the Auditor General, and details of new bank accounts also had to be provided. A manager had been appointed for supply chain management. Full compliance was expected in this sphere by 1 November 2007. Asset and liability management would be improved, with the valuation due to be completed in June 2008. In-year and annual reporting would go according to schedule.

Mr Mofokeng said that an internal audit unit had been established. There had been some challenges with the audit committee and a new chairperson had to be appointed. A risk plan was being put in place. The municipality was endeavouring to enhance revenue and reduce its short tem debt. The overdraft facility was R3 million. Monthly reports were being tabled in terms of Section 71. There was a challenge in terms of the change of financial management systems.

He said that Ngwathe was being assisted by the province. A CFO’s forum had been established in November 2006 where various issues could be discussed. However, the municipality was suffering from capacity constraints. There were several vacancies, and training of officials was necessary to change the mindsets of employees. This was a struggle. There was also a skills gap which had to be breached.

Discussion

The Chairperson said that the submission had covered a range of ups and downs. There were also contradictions.

Mr M Robertson (ANC, Eastern Cape) recommended that the Committee visit the area to verify the situation.

The Chairperson said that this would be part of a broader engagement.

Mr D Botha (ANC, Limpopo) agreed with Mr Ralane. The figures in the budget summary were vague. He noted the expenditure on fuel, and asked how many vehicles the municipality owned and what control measures were in place. It sounded like a lot of money. The municipality wanted to take out new loans, but was already paying R4.5 million per annum in interest. He asked how they planned to repay this. He asked if the tariffs for schools had been increased, as they were unable to pay municipal charges. It was creating a bigger problem. He asked if it was permissible for a municipality to have an overdraft. They should rather cut their expenses to live within their means. No more loans should be made. He asked if there was a repayment plan. He asked what the reaction of the different departments had been to issues raised in the reports.

The Chairperson asked how the budgeted surplus and the overdraft would balance.

Mr C van Rooyen (ANC, Free State) noted that the assets included stock and fixed assets. This was confusing, and he asked where the figures had come from. The investments did not tie up. The income statement did not make sense. He asked what the difference was in the figures quoted in the assets to liability ration, as 2.20 seemed to be the same as 2.2.

The Chairperson needed an explanation on the reserves. He asked how they were linked to the overdraft and surplus figures.

Mr van Rooyen noted that the income had decreased. He was concerned with the manner of the presentation. He noted the use of the word ‘about’ in several places. Financial statements should be accurate. Even historical projects only showed approximate figures. He asked about the state of inter-governmental relations. He had been in the area during August and there had been complaints that the people never saw the municipal manager or the provincial Heads of Department. This was concerning. He asked if there had been any improvement in this situation. It seemed that provincial government in Bloemfontein only sent junior members to try to sort out problems in the outlying areas. He asked if service agreements had been signed, and if performance bonuses had been paid.

Mr Botha asked how the budget was aligned with the Integrated Development Plan (IDP). He asked if the IDP was just something to satisfy the people, as the budget did not seem to speak to it.

Mr van Rooyen noted the investment in Sanlam shares. He asked if the increase was in the number of shares or of their market value.

The Chairperson asked if the budget problem was being handled within guidelines. There were serious issues with infrastructure backlogs, and the municipality should rather invest there. He quoted the example of the New Republic Bank, and warned that anything could happen.

Mr Robertson said that in terms of the MFMA any borrowing had to be cleared by NT. Debts had to be fully paid by 1 July 2008. He noted that there had been no spending on health services, and nothing on the MSIG.

The Chairperson said that there had been no transfer of grants for health.

Mr E Sogoni (ANC, Gauteng) distinguished between the operating and capital budgets. He asked what the contribution of the municipality was towards the capital budget as it seemed it was largely funded by subsidies from national government. He noted that there was a debt for housing. He asked if the municipality was delivering houses, and if so, if the municipality was an accredited provider. He asked what was being done about illegal electricity connections and what the investments were, as they seemed to be mainly shares.

The Chairperson said there was a problem with the long term investments compared to the loans. There was a moral problem of investment in preference to spending on other priorities. Money was on ice, but they were looking for loans. They may invest money not immediately required for projects, but they were still going to INCA and the DBSA. This violated the law.

Mr Sogoni asked about the links to the capital budget regarding roads. Most of the money was in banks. The core function of the municipality was not to invest, but to deliver services. The communities were marching to demand service delivery. The wrong impression was being given. There was an amount budgeted for eradication of the bucket system. He asked what the backlog was, and what the goal was for 2007. R34.9 million had been provided from the Municipal Infrastructure Grant (MIG), but only R25million had been spent. He asked why this was, and if perhaps too much had been allocated in the first place. Monies allocated by the FMG had been redirected elsewhere and been used for staff training. This was a conditional grant, not part of the equitable share formula which could be spent at the recipient’s discretion. He asked if there was a plan to deal with increasing debt.

Ms D Robinson (DA, Western Cape) said that her question on housing had already been asked. She had concerns over the allocation for health spending. She noted that national and provincial departments owed the municipality money. Government had to pay up. She asked if they were being encouraged to do so, and cutting off services was an option. There was a high proportion of money being spent on salaries, and she asked if Ngwathe was getting value for money.

The Chairperson noted that a service provider had been appointed. This sounded like a consultant to him and there were other references to consultants. This was a poor municipality, and every cent was critical. All funding should be channelled to service delivery.

Mr Mofokeng said that the investments and loans had been inherited from the previous Transitional Local Council (TLC).

The Chairperson said that the fact that these things were inherited did not justify their continuation. The bottom line was that Ngwathe was pleading poverty and yet had money in the bank.

Mr Sogoni asked if the inherited loans and investments had been declared. This was an annual requirement in terms of the MFMA. The accounting officer of the municipality had to compile this information and submit the details of each account.

The Chairperson asked if the issue had been raised with the provincial department. If there had been no advice on handling the situation then there would be a problem. The moral issue was problematic.

Ms Robinson asked how long it would take to recover outstanding levies from national and provincial departments.

Mr Mofokeng said that a loan of R9 million from INCA had been secured. An investment of R4 million would produce a return of R9 million, which would cover the INCA loan.

The Chairperson said this was speculation. The figures were misleading, and it seemed the municipality was in the market.

Mr Mofokeng explained that the R4 million investment would cover the R9 million loan in time. They would only be paying interest. The investment would earn interest, and they would be able to pay the balance by 2012. The agreement had been concluded recently.

The Chairperson concluded that Ngwathe was not concerned with its core responsibility of service delivery, but regarded investment as its core concern. This was evidenced by the impression that the municipality seemed to see its prime concern was to service part of its debt by 2012.

Mr Mofokeng said the municipality’s core objective was service delivery.

The Chairperson said that Ngwathe was now compromised until 2012, but there would be no sleepless nights over salaries.

Mr Mofokeng said that the budget was based on the loan, which would enable the municipality to deliver services. They would honour the loans, and were trying to repay them. There were difficulties in upgrading infrastructure.

The Chairperson felt that Mr Mofokeng’s arguments were really not convincing. They had budgeted R23 million for water purchases, but only R6 million for service delivery.

Mr Sogoni said that the INCA loan was only one example. He asked what the position was with the others.

Mr Botha said that the more explanation provided by Ngwathe the more he was becoming confused. He asked what the auditor’s opinion on the matter was. It was disquieting.

Mr van Rooyen was also confused. In some places information had been doubled. Something seemed to be terribly wrong in the municipality.

The Chairperson noted that feedback was a problem.

Ms AS Fourie (SEM, Free State Provincial Treasury) said that the grants given to Ngwathe were not reconciled. This situation would have to be rectified. In terms of salaries, there had been an abnormal increase for the Municipal Manager and senior management. They had discovered that figures given referred to the same information in different places. One report had stated the amount of debt as R92 million, a second at R113 million and a third at R180 million. These were huge differences. They had received reports, but they were difficult to assess. Monthly discussions were held. Four or five visits were paid each month for scrutiny.

She said that the new financial system had been implemented, but there were different views as to when it would become operational. There was an impact on the audit process. Regarding the debts of provincial departments, the treasury required detailed accounts. The departments would then be told to analyse the accounts and to explain within forty days or pay up. If this did not happen, their debts to the municipality would be recovered from the equitable share formula.

Mr Kaiser Maxatshwa (Chief Director, Free State Department of Local Government and Housing) said that there was a structure for inter-government relations. The Municipal Manager should be on the technical co-operation forum. Representation in this forum was difficult because of a high staff turnover. Information had been distributed on compact discs with all the applicable bylaws and policies. Municipalities did not need to go out to buy this information.

Mr M Ramphele (Senior Manager, DPLG) said there were a number of outstanding issues. There was a sort of patter. He asked what the total staff establishment was. The proportion of salary expenses had decreased from 33.2% to 32.2%, but was expected to increase to 35% in 2008. Clarity was needed. The municipality expected to raise R9 million from the sale of land, and this was a serious issue. There might be a surplus. The Property Rates Act had an implementation date of 2008/09. He asked to what extent this municipality was ready for this, as certain things would have to be in place. There was a disjuncture regarding the figures. Ngwathe was highly indebted, and had no credit rating. It was struggling to meet current liabilities. He asked what the nature was of the disclaimer that it had received.

He said that the system could not be changed overnight. He asked why the change in computer systems was occurring at the end of the FY. Action was needed on a number of issues. Capacity constraints were partly due to the municipality inheriting unskilled officials. He asked if there was a skills development plan, and if it was related to the Sector Educational and Training Authority (SETA). Revenue collection was important, and there was a current business plan. Amounts needed to be reviewed, and savings should be used to improve revenue collection. A financial turnaround strategy was needed. The situation was fragmented and confusing. The MFMA had been in place since November 2004. Target dates had been planned then.

Mr Vincent Malefe (Director, NT) said there were contradictions in the presentation. R1 million had been budgeted from an electricity grant but the municipality had spent R2 million. He asked where the money had come from. Spending had to be in accordance with government priorities. There was a high budget in the capital budget for the eradication of the bucket system, and the target should be reached soon. He asked if the target for water would be met during 2008, or if this had been met already. He asked what was meant by institutional development, and if this was in line with government priorities. The numbers had been reached after a process. He asked what the municipality’s contribution to the capital budget was, as 73% was being provided by national government. This should be looked at seriously. There was a lack of capacity. This was not just in the financial sphere but in the technical sector as well.

Mr Khwathelani Bologo (Senior Manager, DPLG) said the report was fraught with contradictions. The challenges needed to be addressed properly. Under the FMG there had been five interns at one stage, but there seemed to be none now. Money was allocated for training, so this should not be a problem. Borrowing must be sanctioned by NT. He asked what had happened to the interns. They had to be in place if this grant was to be earned.

Mr Mofokeng said that one of the interns had been employed while the remaining four had gone to other municipalities.

The Chairperson said that the DPLG had raised an interesting matter. There was huge potential in the Parys area, and there were new developments every day. An immediate investigation was needed into the phasing in of new property rates. Business was booming. An evaluation should be extended into the 2008/09 FY to see what the position was on the ground. The whole report needed to be reviewed, and could be changed. It was a problem that Mr Mofokeng was only an acting CFO. A properly qualified CFO was needed. Competence was critical in the appointment of financial staff. The delegation must go back to Ngwathe and do things right.

Mr PJ Molibeli (Councillor, Ngwathe Municipality) thanked the house for its advice. He affirmed the municipality’s commitment to service delivery.

The Chairperson reminded them of the need for proper proceedings and financial commitments.

Setsoto Municipality presentation

Mr TJ Makelefane (Municipal Manager, Setsoto) said that the municipality lay in the Ficksburg area. It was one of the smaller municipalities. However, there was no history of suspension or expulsion of councillors, and the management team was unchanged since it had been appointed. They had won the Premier’s excellence award. This might sound glamorous, but was a proud achievement. Up to March 2007 it had received R31.9 million in conditional grants, and had been able to spend every cent. For the current FY, R73.1 million had been transferred from NT and of this R49.6 million had been spent. The difference of R23 million had been invested. Most of the spending to date had gone towards the eradication of the bucket system. All received funds would be spent by November 2007.

He said that the budget had been done according to regulations. It was interlinked with the IDP. This process started in August and the budget process in September. After going through departmental and management consultations, ward based planning took place. Council would approve the budget during May. In the predominantly white areas, the residents did not attend budget meetings and only became involved at a late stage. Comments were generally only submitted after the budget had been approved. There was participation in the predominantly black areas, but this only involved about 22% of the population.

Mr Makelefane presented the budget for 2007/08. The total operating expense budget was R293.6 million. This included amounts of R66.6 million for salaries, R60.1 million for general expenses, R11.1 for repairs and maintenance, R15.9 million for capital charges, a R131.3 million contribution to capital expenses and R8.5 million in contributions. The budgeted income was R286.7 million, of which R22.3 million would come from assessment rates, R184.5 million from grants and donations, R59.8 million from levies and R19.9 million from other sources.

He said that all debtors’ billings were done on a monthly basis. The ledge was done and reconciled monthly. Bank reconciliations were done daily. The financial system used was called Finstel. Audit reports were based on a high standard. The municipality had received a qualified report in 2004/05 and a disclaimer in 2005/06, based mainly on technical points. Setsoto had changed over to the GAMAP/GRAP set of accounts during 2005/06.

Mr Makelefane said that there were outstanding loans amounting to R25.5 million at the end of the 2006/07 FY, down from R29.7 million the previous year. The repayment per annum was R7.8 million of which the redemption portion was R4.1 million. Both capital and operating expenditure had increased. Personnel expenditure had increased due to an expanded structure by the creation of a fourth directorate.

He said that there were excellent relationships with the various departments. Reporting was done on time and there was regular interaction. The municipality received good financial assistance and technical support. Under Project Consolidate, Setsoto had received and spent R734 thousand in terms of the MSIG. In terms of funds received under the Division of Revenue Act (DORA) grants to the value of R1.5 million had been received although the total expenditure was R1.6 million. There had originally been two interns, but one of these had resigned to take up a position in provincial government.

Mr Makelefane said that the municipality’s structure had been reformed to cater for risk. A risk management officer had been appointed and was undergoing training. There was an anti-fraud and corruption strategy in place. Various committees were in place for supply chain management. An asset management unit was in places as well as an internal audit. Positions for an audit committee had been advertised.

Mr Makelefane said the municipality faced a number of constraints. There was an annual drop in income from November to January, as well as before and after an election. There was no sustainable funding for MFMA implementation. Full basic services were not fully subsidised. R9 million was needed to implement the Property Rates Act. Technical assistance was not included in the equitable share. An additional R18 million was needed to eradicate the bucket system. Bulk infrastructure needs were R42 million, with the main project being the Ficksburg dam. A loan application had been submitted to the DBSA. There were a number of employees from other divisions in the municipality. The provision of water and electricity to rural farms was not up to the required rate. There was a low rate of job creation, although infrastructure projects would create employment. However, these projects would only provide temporary employment. There were staff vacancies, especially in the technical division. Organisation reforms were needed, and the province’s assistance was needed in this aspect.

Discussion

The Chairperson found it interesting that revenue dropped between November and January and at election time. He said that the Committee understood the needs of municipalities, as some definitions still dated from before 1994. The eradication of the bucket system of sanitation was a priority. The allocation of funds was based on current definitions. There were clear cut issues regarding DORA. This was not Setsoto’s responsibility. It seemed that the municipality wanted to go it alone, but all needed to participate in feasibility studies. The municipality could initiate action, but must get national departments and neighbouring municipalities involved. The extra R42 million requested should not be a problem for the planned infrastructure.

Mr Botha raised a query about the balance of loans against investments. The municipality ran to the private sector every time there was a problem. Funding of the municipality’s costs should come from income and not from grants. He asked how the new regime could service new loans on top of those incurred previously.

The Chairperson said that the loan application to the DBSA should then be withdrawn. They should look into the possibilities of funding from within the government system first. Technical assistance should come from the equitable grant, and there was built-in capacity. People were being innovative.

Mr Robertson queried the amount spent on salaries and allowances.

The Chairperson asked what was covered by general expenses. It was a big item.

Mr Botha asked what the opinions of NT and the provincial treasury were on the loans.

The Chairperson said there were borrowing powers in the law. However, Setsoto should take its cue from the Committee. They should first look for in-house funding before they exercised their borrowing powers.

Mr Sogoni said that it was a difficult presentation to understand. There was no breakdown of the conditional grants. He asked when the current FY had started. It was normally in July for the municipalities, which meant that R49 million would have been spent in the first two months of the FY. The municipality must have great capacity if this was the case. They said that the balance was being invested. It seemed that everybody was investing. The objective of the Committee was not just to see beautiful reports, but to see how it could assist the municipalities. Everything seemed to be glamorous.

The Chairperson said that the municipality would have to forward the details requested by Mr Sogoni. The onus was on the Committee to check on the projects being undertaken for sustainability and value for money. He doubted that Setsoto could be the best municipality as there were three pages of constraints.

Mr Sogoni said that he was going there. Commenting on the 2007/08 budget, he noted that the concept of discretionary funds had been outlawed. However, there was a huge amount set aside for general expenses. He asked what these expenses were. He asked who was contributing to the capital budget, and what projects were being undertaken. The Committee had to play an oversight role. He asked what the levies were that were reflected on the income budget. He wanted an explanation of the R19.9 for other expenses. He asked why there had been disclaimers on the municipality’s annual reports for 2005/06 and 2006/07. It would be useful to know why these had been issued, and what had been done to address the issues raised. He did not understand the credibility of the budget, especially on the question of salaries. He asked what percentage of the budget these were.

Ms Robinson said that Mr Sogoni was reading her mind. The bar graphs in the presentation said little and more detail was needed as they were vague. This made it easier to cover things up.

Mr van Rooyen asked to what extent the constraints tabled impacted on service delivery.

Mr Sogoni noted that a risk management officer had been appointed, but apparently did not know what to do. He asked who sat on the various committees.

Ms Fourie said that the same matters had been raised with the provincial treasury. There was interaction with NT. The provincial treasury had only become involved at a late stage of the budget process. Salaries were 36.9% of the operating budget. The disclaimers had been issued on technical maters. It was NT’s opinion that the process should be implemented in phases. Specimens had been taken of the municipality’s administrative processes, as these had to be compliant to standards. There had been an increase in debtors from 2005 until 2007.

Mr Maxatshwa said that the municipality did participate in provincial local government forums. This was the reason for the flow of work which they produced. Under Project Consolidate they had received hands-on support. Qualified engineers were working with the department on the question of expenditure. Reports had been submitted on time. The whole management team at the municipality had remained intact for five years.

Mr Ramphele said that DPLG did not have much to say. Money was allocated for one FY rather than two. Spending must correspond with the purposes for which the money was granted; therefore it was important to see the results. The municipality still needed money to implement the Property Rates Act. This was needed for the creation of valuation rolls and other tasks. R300 thousand had been approved for this. He asked if it had been sorted out yet as it seemed the valuation roll still did not exist. DPLG would be content if this did not become a recurring expense. He asked if the upgrading of the billing system had been completed or if it was still ongoing.

Mr Malefe added that the DPLG did not need to cover all costs fully. The capital budget could be fully financed from the MIG and other national grants. He asked what the municipality was putting on the table to balance the budget. Money had been transferred accordingly for the shortfall regarding the bucket system eradication project. The balance had been invested. He asked what happened to the interest on this investment, and if it should be used to service the shortfall. On the subject of the DBSA loans, he was concerned that future MIG funds would be pledged to the bank to cover the loans. This was a dangerous practice, as it would leave no money for service delivery. It was a serious concern, especially if for some reason an investment could not be recovered. Expenditure from MIG funds transferred since April 2007 was R49 million. There were serious issues with the provision of bulk infrastructure. There was a special challenge with water supply. There should be co-operation on a regional level.

Mr Ralane said that all the municipalities which would benefit from the water project should be identified. The main source of water was from the Highlands scheme in Lesotho. Greater discussion was needed, and there would be discussion with the Department of Water Affairs. The matter had to be dealt with properly. There might be a serious problem with the conditional grants. The conditions attached to these grants were clear. Funds which were subject to discretionary spending were stipulated in the DORA, but conditional grants were not part of this discretion. The R18 million shortfall should be covered by the R23 million investment.

Mr Bologo said that the operating budget had increased to R286 million but expenditure was R293 million. The award to the municipality should be recalled as it was budgeting for a loss. They had been told that they could not budget for a deficit. There were listed stages in the budget process, but there had been no public consultations. If these had occurred, they were not mentioned in the report.

Ms Fourie said that provincial treasury was waiting fro a report on the water grant. The municipality was making more investments, and this needed to be discussed.


The Chairperson said that all stakeholders must be called together. A meeting must be set up with the provincial treasury and provincial Department of Local Government and Housing. These matters had to be cleansed. There were opportunities and possibilities. The parties could engage more on the issues, which had to be made clear. Property rates needed attention. He cautioned the municipality by quoting the story of one province which had made a glamorous report while the other provinces had submitted honest reports. The glamorous province was then awarded R10 million from each of the other eight provinces. However, this province was now the worst performer. It was not a big deal as long as the stakeholders worked collectively. The Committee was able to see good performances, and would reward them accordingly.

Ms Lillian Oljohn (Councillor, Setsoto Municipality) said that the Setsoto Municipality would be the envy of others after their reports were submitted.

The meeting was adjourned for lunch.

After the break, Mr Makelefane clarified the investment issue. This was actually money which had been put aside in a separate account in order to finance active projects. The primary project here was the eradication of the bucket system.

The Chairperson said that they must find space to deal with the water issue. Several municipalities would benefit. If the principle of bulk infrastructure was compromised there would be problems. It must be prioritised immediately, as the first quarter had already passed. A meeting would be held in October. A feasibility study must be started immediately, and money must be put aside.

The Chairperson said that the remaining delegations would present one after another, and Members would ask questions once they had all made their presentations.

Moqhaka Municipality presentation

Mr Mokete Duma (Municipal Manager, Moqhaka Municipality) presented the expenditure by the municipality over the previous four years. The amount budgeted for salaries and allowances had been spent. It amounted to 41.5% of the operating budget. This had been the result of a top-up adjustment in terms of the upper limits set for councillors’ salaries. Agreement had been reached with the bargaining council. The treasury was stagnant, and this put the municipality in a bad light. The budget for repairs and maintenance had not been overspent. There were no serious loans, except one from the DBSA for a water scheme. Of the expenditure on water, 80% was unaccounted for due to a lack of meters. Money received from MIG grants had all been spent. Provision had been made for some projects which the municipality had started on its own. The budget was aligned to the Free State’s growth strategy.

Dihlabeng Local Municipality presentation

Mr Martin Mahlalela (CFO, Dihlabeng Local Municipality) said that Dihlabeng was a medium municipality. The 2007/08 budget for operating expenses was R306 million, an increase from R286 million the previous year. This was an increase of 6.7%. It was a credible budget, and was the product of a balance process. There had been an increase in tariffs of 8.5%. A debt recovery plan was in place. To support the capital budget R29 million would come from the MIG and R24 million from internal funds. The total of government grants was R51 million, of which R29 million would be spent on projects to benefit the indigent. There were nine thousand indigent people in the municipality. The salary budget was 36.49% of the operating budge, but this would have been more if all the posts were filled. By the end of August 14.8% of the budget had been spent, but that should be 16%. Of the budgeted income, 19% had been received against an expectation of 16%. On the capital budget, 19% had been spent to date.

He said that they had recently gone into partnership with Business Connexion to manage their financial systems. New and old systems would operate in parallel in the mean time. There had been disclaimers on the last three audit statements due to the number of outstanding debts. There was also a problem with fixed assets as there was a lack of supporting documents. These problems were being rectified. There was a lack of internal controls which had led to the municipality being described as not being a going concern.

Mr Mahlalela presented the risks facing Dihlabeng. There was no internal audit unit although this was about to be appointed. There was no audit committee in position yet. There was a lack of policies. There were a lot of vacancies, especially in the financial department. He had been appointed as CFO recently, and this post had been vacant for the previous two years. There was an outstanding debt of R169 million. Loans had risen from R49.5 million in 2005/06 to R50.2 million in 2006/07. The loans had been used for infrastructure development. The increase in the loan amount was primarily due to an amount of R3.2 million which had been used for new vehicles. The municipality had avoided making other loans. An investment of R7.9 million in the 2005/06 FY had been reduced to R1.1 million in 2006/07 as it had been used to complete various projects.

He said that R243 million was needed for capital expenditure and this figure was increasing. There were projects on hand for water and electricity supply, the eradication of the bucket system, roads, sport facilities and others. The income for 2006/07 had increased by 20.1%. The current figure for debt collection was 60%. The municipality was trying to increase this, and there was a plan in place.

Mr Mahlalela said that the DPLG had assisted with the recovery plan, and there had also been assistance from the private sector. The property rates procedure was in process, and the DPLG had identified a service provider to assist with this. There was a need to train officials, and to give staff the necessary financial management skills. There were infrastructure capacity needs. There had been many resignations from the public works department. There was a water pipeline which would be erected, and there were various road projects as well. Not all staff members had signed performance agreements. The Municipal Manager had resigned and there was an acting official in place. Interviews for a permanent appointment would be held later that week.

Mr Makheba Tlutlwa (Municipal Manager, Nala Municipality) said that the Nala Municipality was located in the area of Wesselsbron, Bothaville and surrounding areas. They had been due to present to the Committee the previous day, but the invitation had been late. The budget had been approved in May 2007. There had been extensive community participation. There had been disclaimers on their previous reports. The salary bill was currently 26% of the operating budget. It was likely that this would increase if all the posts were filled. There were two different financial management systems in place, and these did not communicate with each other. They had budgeted for grants of R132 million, of which R40 million had already been received. They had received R97 million from the MIG, and of these funds R42 million had already been spent. The main project was the eradication of the bucket system. Reports had been sent regarding the MSIG. Interns had now been permanently absorbed into the municipal structure. Organisation transformation had not been completed, and compliance with the MFMA had not yet been totally realised.

Discussion

Mr van Rooyen noted a disturbing trend. Dihlabeng’s expenditure included legal fees of R1.5 million, transport costs of R9.3 million and an entertainment expense of R564 thousand. R65 thousand had been given to civic funerals, but nothing had been allocated to ward committees. The mayoral fund received R700 thousand and the markets R880 thousand. An amount had been budgeted for sponsorships, but nothing for capacity building.

Mr Robertson noted that Dihlabeng’s expenditure for 2006/07 was R286 million, but was alter stated as R242 million. These figures did not correspond. The salary bill was already at 41% of the operating budget despite a number of vacancies.

Mr Botha asked about the loans and negative balance compared to investments. Dihlabeng was bankrupt. There were R90 million of outstanding loans and an overdraft of R9 million. This did not compute with the income.

Mr Sogoni said these figures did not reflect well on Dihlabeng. He asked what the status of property valuation was, for an explanation of the general expenses and for the status of progress on the eradication of the bucket system.

The Chairperson said that the budget of Dihlabeng was not balanced. There were a number of vacancies. Nala had its own problems. It seemed that almost all of the municipalities needed intensive care. The provincial treasury must prioritise municipalities. There were opportunities and possibilities. Nala was in the heart of the maize country. There were opportunities for growth in Moqhaka. There were huge developments and opportunities in Dihlabeng.

Mr ZS Sikade (Councillor, Nala) said that training was needed. This had to be done in the required timeframe.

The Chairperson said that the team would assist them, as well as other departments.
The meeting was adjourned.

Mr SJ Matli (Councillor and Acting Mayor, Moqhaka Municipality) said that he had taken note of the discrepancies and that there would be an in-house attempt to solve their problems in Moqhaka.

Mr Job Tshabalala (Acting Mayor, Dihlabeng Local Municipality) said that he was aware of the shortcomings in Dihlabeng. There was one loan of R49 million which had increased to R50.2 million and he suspected that the Members might have thought these were two separate loans. Dihlabeng was always striving to learn and to rectify problems.

The Chairperson said that in looking at all the issues he felt the budget process was a key issue. The provincial treasury should not be at the tail end of the process. Critical issues should be prioritised. When faced with these reports, he sometimes wondered what the people were being paid to do. There seemed to be no money for capital projects. There was no service delivery. The biggest problems were highlighted by public demonstrations, and this was the biggest indictment of the municipalities concerned.

Funding was always said to be inadequate, but government had limited resources. If a municipality asked for R200 it would be lucky to get two cents, and they had to work within these confines. Pleading poverty was not the solution. DORA required that a three-year budget should be submitted, and municipalities should plan accordingly. They often only planned when the money was already in the bank.

The Chairperson said that there were problems with capital budgets and conditional grants. Poor rural municipalities could not only depend on grants. The DBSA must ensure their viability. He was also concerned about the generation of revenue. Tariff structures were terrible, and sometimes discouraged investment. Business would move away to more conducive places. This compromised the macro economic situation.

He said that salary increases were out of line. Special projects in the mayor’s office were problematic. They often were related to issues of HIV/AIDS, the youth and women, and should rather be dealt with in a broader development context. The IDP should be on a broad front. Clear identification of programmes was needed. The implementation of the MFMA should be monitored. The budget should be informed by the IDP. Every cent of municipal funding should be channelled into service delivery and nothing else.

Co-Operative Banks Bill: briefing by National Treasury

Ms Jo-Ann Ferreira (Chief Director: Legislation, NT) agreed to keep her briefing concise. The Co-Operative Banks Bill was part of the financial regulatory framework, and would create second and third tier classes of bank. The purpose of financial regulation was to establish and maintain financial stability, promote efficiency of the financial system and soundness of institutions, to protect the consumers of co-operative banks and to promote access to financial services. She described briefly the purpose of the Bill, and how the goals would be achieved.

She said that the types of bank that would be created would be primary savings banks, primary savings and loans banks, secondary co-operative banks and tertiary co-operative banks. A co-op bank would have to demonstrate that it could function competently. The Director had to be experience and knowledgeable, and the composition of the board had to be appropriate. The constitution had to provide for the appointment of audit and governance committees. Provision had to be made for the supervisor to direct the bank to amend its constitution. This would provide the best protection for consumers.

Ms Ferreira listed the bunking functions that could be provided by the different level of co-op banks. All basic functions would be provided by primary level co-op banks with more advanced functions at the secondary and tertiary level institutions. General functions would allow for co-op banks receive grants, to apply to be representative bodies, to establish dispute resolution schemes and appoint an ombudsman together with other co-op banks of the same type, and to act as an intermediary. A co-op bank would have to meet certain minimum requirements in terms of capital requirements, asset quality, liquidity and surplus reserves. Inabilities to satisfy these conditions would have to be reported to the supervisor, which could see the bank being suspended or re-registered. She added that the prudential requirements had been simplified significantly.

She said that Chapter IV had been titled “Deposit Insurance Fund and Schemes”. During the debate in the National Assembly, the opinion had been that there should only be one fund. The wording ‘and Schemes’ had therefore been deleted. Section 26 stipulated that the Development Agency for co-operative banks must establish a Deposit Insurance Fund with funding and auditing requirements. This would apply to all levels of co-op banks. Funds would be used to compensate members for deposits lost should a co-op bank fail. Participation in the fund would be compulsory.

Ms Ferreira said that Section 27 would make provision for the amalgamation of co-op banks. Mergers would enhance the common bond. Representative bodies would have to represent two or more co-op banks. The body would have to be knowledgeable, experienced and competent, and there would have to be sufficient capacity.

Ms Ferreira said that the South African Reserve Bank (SARB) would be the supervisor of primary co-op banks with deposits of more than R20million, and all secondary and tertiary co-op banks. Primary co-op banks with deposits of less than R20 million would fall under the supervision of the Agency, which would have to notify the SARB when a primary co-op bank passed R20 million in deposits. Supervisors had to submit annual reports to the Minister.

Ms Ferreira said that the Co-Operative Banks Development Agency would be established as a public entity accountable to the Minister of Finance, and would be governed by a Board appointed by the Minister which would have a managing director and management team. Funding would come from the National Revenue Fund and the collection of fees under the authority of the PFMA. Its general functions would be to support, promote and develop co-operative banks. It would manage the deposit insurance fund. It would regulate and supervise co-op banks which had deposits of less than R20 million. It would register representative bodies. It would interact with regulatory authorities.

She said that any co-operative bank could appeal to the board against any decision of the supervisor or the Agency on matters dealing with registration or accreditation. There would also be an appeals board consisting of three members appointed by the Minister. Various offence and penalties were stipulated in Sections 77 to 80. The offences were the unlawful use of the words ‘co-operative bank’, provision of untrue information, criminal liability of directors and other persons and failure to comply with directives under the Act. Penalties would be in the form of fines or a jail term not exceeding ten years.

Ms Ferreira said that Chapter XII would make general provisions for fair administrative actions, certification of documents and access to records, register and other documents. It would also allow the Minister of Finance to make regulations in a broad range of areas. This was a new regulatory environment. A bank might also be exempted from certain provisions of this Act or any other Act administered by the Minister. Various laws would be amended, including the Bank Act (1990), the National Payment System Act (1998), the Financial Services Ombud Schemes Act (2004) and the Co-operatives Act (2005). The National Assembly had discussed the alignment of this Bill with the Competition Act. It was not subject to the Competition Commission. The moment this Bill became law, the interim regulations in place at present would fall away.

Discussion

The Chairperson said that there were investment issues. There might be attempts from several groups to establish a co-op bank. Poor rural municipalities or communities might be tempted to do this. In many areas people had to walk long distances to reach banks. Clarity was needed on who would form the banks. The process was clear.

Mr van Rooyen asked if co-op banks would be subject to SARB regulations on deposits. He asked if they would be able to buy and sell government bonds. He asked if the SARB would act as a banker for them. He asked when the Agency would be in place.

Mr Sogoni referred to Section 68 of the Bill, and asked what funds would come from national sources.

Mr Nkosana Moshiya (Chief Director, NT) said that this Bill would create regulations. In terms of the Bank Act, a new bank needed R250 million in capital. There were a host of prudential regulations. Skills levels had to be taken into account. There would be four types of co-op banks, and two of these would be able to sell and buy bonds. At the primary level the banks would only really cater for deposits and lending. The secondary and tertiary banks would handle more advanced functions. It was intended to have the Agency in place by April 2008. Regulations were being set up.

Ms Ferreira said that the Agency would be a public entity under NT. There would be transfer payments. It should not be funded purely from the co-op banks, as that would be a threat to its independence.

The Chairperson said that this meeting was opportune. They had met groups of more than two hundred in the provinces who were trying to create co-op banks. Structures would be formed.

Voting on Co-Operative Banks Bill
The Chairperson asked if any of the Members opposed the Bill. There were none. Mr Sogoni proposed that it be accepted, seconded by Mr Robertson. Mr Robertson would make a statement the next day when the Bill was debated. It was very urgent to pass it.

The meeting was adjourned.

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