Municipal Finance Management Act Implementation: Treasury briefing

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Cooperative Governance and Traditional Affairs

25 February 2008
Chairperson: Mr S Tsenoli (ANC)
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Meeting Summary

National Treasury gave a presentation to the Committee on the content and implementation of certain sections of the Municipal Finance Management Act. National Treasury had formed an implementation team with representatives of the South African Local Government Association, the Department of Provincial and Local Government and provincial treasury and departments. It was stressed that although the Act had been in operation for a while, municipalities were given time to phase in to the requirements. Technical support was given and the coordination team met quarterly. Treasury expected to see qualitative improvements over the next three to eight years. The legislation was working and proven, but challenges still remained in implementation and buy-in by Councillors and municipal managers. The presentation gave a summary of the phasing in time periods. Over the next three to five years the focus would be on improvements in asset management, the budget process, content and formats. Service delivery and implementation plan must be linked to the budget and to performance contracts of senior officials. Measurable performance indicators must be used. There were attempts to streamline processes. National Treasury was encouraging adoption of Generally Accepted Reporting Principles, risk management and approved costing models, as well as to improve credit ratings. A number of comparisons were tabled and explained in relation to compliance and reporting. The Financial Management Skills Training Programme was discussed. Training material should be completed by May 2008. The Municipal Financial Recovery Service had been formulated, to assist in identifying causes of financial problems and provide potential solutions. The interventions being made currently by National Treasury, described as work in progress, were described.

Members raised questions on whether the Act could be criticised as anti-developmental, who had responsibility for coordinating Monitoring and Evaluation, the phase-in implementation, the turnover in municipalities, training of interns, why only some municipalities were accessing the bond markets, and interventions. Further queries related to the steps to be taken in terms of reporting, cooperation by municipal officials, assistance on credit ratings, whether municipalities were linking their budgets properly to integrated development plans, the vacancies, and the need to consider including in annual reports whether municipalities were paying attention to sustainable development and environmental concerns.

Meeting report

Municipal Finance Management Act: Implementation briefing: National Treasury (NT)
A team of presenters led by Mr TV Pillay, Chief Director: Municipal Finance Management Implementation Unit, National Treasury, set out the National Treasury (NT) efforts towards implementation of the Municipal Finance Management Act (MFMA). They noted that NT was working collectively with a number of other stakeholders in implementing this legislation, including South African Local Government Association (SALGA), provincial Treasuries and provincial Departments of Provincial and Local Government (DPLG). The Municipal Finance Management Act (MFMA) Coordination Team, with a coordinator in all provincial treasuries, assisted in support.

The financial reforms commenced in 1998. At that time, the Local Government Transition Act was quite sketchy, and relied on reams of ordinances. In 1999 the Public Finance Management Act (PFMA) was introduced for national and provincial government, but similar issues arose for municipalities. Out of that process came the Municipal Finance Management Act. Prior to the enactment, while the drafts were being developed, the principles were tested in selected municipalities, including district, local, small rural and two metros. Good lessons were learned from this, and were being implemented.

The package of support included the introduction of a financial management grant, and this was contained in the current Division of Revenue Bill, setting out the grant and the sequence of support in the implementation phase. Support also included a technical assistance programme, including a number of international advisors, and this was implemented across the entire country. The technical assistance was introduced and the programme ran for a while with direct support. At the moment there was limited technical assistance to some municipalities. Many were receiving support from national and provincial departments. A coordination team met every quarter. The phase-in strategy assisted NT to take care of weak-capacity municipalities as well as those with high skills. Capacity reviews guided the phase-in.

There was a launch throughout the country with nine regional workshops. It had been expected that there would be nominal compliance within the first three years, given the capacity constraints. NT expected to see qualitative improvements over the next three to eight years. The Committee was urged to think about challenges. The legislation was working and proven. The dates for implementation were tabled. An internal audit unit was phased in, and so were reporting requirements. Reports were now being published in various websites and provincial gazettes, around spending. There were minimum requirements for Chief Financial Officers (CFOs) and regulations were in place.

The priorities at launch of the MFMA were set out quite clearly. Municipalities were given a template of the implementation plan. Appointments of Municipal managers and chief financial officers were another priority. Verifying and addressing of cash management was also streamlined. Primary bank accounts, top management teams, status of partnerships and long term contracts, and delegations were established. In addition there had been identification of municipal entities, and all outstanding annual financial statements were submitted for audit. The role and responsibility of councillors and officials was reviewed, including the necessary training, and compliance with Division of Revenue Act (DORA) was monitored.

A summary was given of the phasing in of the regulations. The transition for municipalities must be achieved in five years. It was stressed that the regulations were drafted after considerable discussion and practical support. The approach was to issue guidance through circulars before publication of the regulations. Asset transfers would be effective in July 2008.

The planning over the next three to five years would stress improvements in asset management, the budget process, content and formats. The largest cities had already begun to implement the budget process. Section 71 required in-year reporting and section 72 required a mid-year report, which could enable them to do an adjusted budget, if absolutely necessary, and within strict time frames. The service delivery and implementation plan must be linked to the budget and to performance contracts of senior officials. Measurable performance indicators must be used. There were around 1 500 different questions being asked of municipalities, and there was currently a huge amount of duplication. The coordination team was trying to get this process more streamlined. NT would like municipalities to publish quality information on a municipal website and have monitoring agencies to monitor it, as already set out in the MFMA. Guidelines on the Annual Report would not only improve the format of these reports, but also oversight.

Old standards of accounting were used prior to 1998. In 1999 NT had published the Generally Recognised Municipal Accounting Practices. Some municipalities had adopted it, and others had not. NT was encouraging municipalities to do so. NT hosted risk management workshops to raise awareness of best practices. A debate was also required on an approved costing model for services in a more structured way. Credit ratings must be improved.

The presenters then dealt with the Municipal Financial Recovery Service (MFRS). This was intended to assist in identifying causes of financial problems and provide potential solutions. It should also assist in preparation of financial recovery plans, and avoid duplication. National Treasury was now reviewing the intervention and using that to draw best practice. Formal and informal interventions were to be made, to assist national and provincial officials in terms of recovery development plans. Unless there was commitment by municipal officials, including Councillors, there would be no success. Areas were identified, but often systems were not put in place to achieve results. NT had to improve coordination in order to produce results. It was also critical that NT be informed when interventions took place.

The Financial Management Skills Training Programme was outlined. This aimed to develop knowledge and skills in strategic management, budgeting and finance. The Municipal Finance Management Internship Programme was formulated, which assisted in criteria for selection, mentorship, progress reports and personal development plans. Provincial and municipal advisors were being used to fast track skills transfer. Two approved programmes were registered with the South African Qualifications Authority. Training material was being prepared and should be completed by May 2008. Local Government Sector Education Training Authorities would be used to roll out the training, and all content would be checked by National Treasury. There must be reports on progress. 

Detailed slides showing progress on implementation were then tabled, drawn from responses from municipalities. The charts compared the years 2004/05 to 2006/07. There had been steady progress tin implementation of management commitments and reforms. The vacancy rate for municipal managers and chief financial officers showed that it took a time for the structure to unfold. The vacancies posed challenges in implementation. There had been an increase in reports not tabled to Council, but this reflected the phase-in of medium capacity municipalities. There had been increased delegations, and there was also steady improvement in the effectiveness of the delegations. There was increase in commitment to the reform programme. The presence of technical advisors assisted a more rapid implementation than the national average. There was an overall trend that municipalities were submitting budgets on time, and more were approving budgets on time from 2006/07. The percentage of municipalities with credible budgets had risen, as also those with key budget reforms. NT explained that credible budgets were those which had achieved alignment between the budget and the likelihood of achievement, as also whether the budget was funded, either through DORA or through revenue contributions from their own resources, or through a structured borrowing programme. On the operating side, credibility would be based on sufficient working capital, taking account of non-collections. He referred Members to Circular 42, which contained details on how to test if the budget was funded, and stressed that all municipalities should do that test.  A low percentage of municipalities had received a clean audit certificate; there were still a high number of disclaimers and adverse opinions. The Mayor was, in terms of section 71, to table quarterly reports in Council to ensure oversight and detect financial problems. The progress in this was also tabled. The submission of Annual Reports on time had improved.

It was noted that 72% of municipalities now had internal audit units. Most of these were in-house. 82% had internal audit committees. Municipalities had improved their communication with 60% having established
websites. However, only 20% displayed the information required by Section 75 of the MFMA on their site. Diagrams were given of municipal entities; the most used were those for development and planning, including economic development and housing. After the supply chain management regulations become effective in 2005, there had been an upward trend in adoption of policies by Councils. Statistics were also tabled in respect of cash management and expenditure controls

It was stressed that National treasury had a number of initiatives as work in progress. The programme of reforms was outlined. These included guides and new formats for budget regulations, annual reports, cash management and investment, tariff, revenue and costing and guides also for Standard Chart of Accounts, asset management and asset transfer. There had been training and material development for officials and practical implementation progress. There would be technical support given to provincial treasuries, a Municipal Finance Recovery System, councillor training coordinated by SALGA, and improvements in the quality of information on the databases. NT had gone into various municipal websites and suggested how these could be better drawn, and had also taken active steps to improve its own website, logging all calls from municipalities and structuring the guidelines around those questions.

The challenges included the need to address the spirit of the MFMA. Grants in the Division of Revenue Act and the frameworks for them must be considered. NT was also to set key priorities and implement them timeously. It would improve on employment selection and practices. Weaknesses in internal processes, execution of delegations and change of mind set and behaviour must be addressed. Rewards could be improved, but these should be linked to performance. There should also be implementation of mechanisms to deal with failure to comply with the law, and appropriate disciplinary measures, including withholding of funds.

Discussion
Members asked a number of questions, and at the outset National Treasury gave a broad response to the effect that it did not yet have all the answers. A number of the questions posed went to the internal workings of the municipalities and would require further research. Although examples had been presented, they could not be construed as the final picture. They would try to comment on some of the questions and welcomed them as shaping what NT would do in future. They might not be able to respond to everything but implementation challenges could be addressed through the forum. The research had been a very time consuming exercise. A research team of four staff was constantly on the phone to municipalities.

The questions were as follows:
Mr P Smith (IFP) said that it was a very useful engagement with National Treasury. He said that there were many criticisms around the MFMA. He wondered if it could be seen as anti-development, and if so, asked what criticisms might have been levied.

National Treasury responded that in the past, the system was so rigid that there was no option for a municipal official to deal with financial management in innovative ways. The MFMA was enabling, in many instances, and spoke about developing frameworks and issuing guidelines. It was less prescriptive and more enabling than the previous method. However, if did require a mindset change on the part of officials, and that was perhaps not fully accepted. There had been no specific queries from officials that provisions be deleted. The questions and comments to NT rather sought explanations or further guidance. Whether this was regarded as the Act being “onerous” was questionable. It was reiterated that circulars would be provided, rather than the regulations themselves (which were issued after the circulars) setting out that a certain procedure must be done only in one way. The reforms around public accountability and transparency meant that set forms were not in place. It really depended on how the operation was seen. He would be interested to hear from those who claimed it was onerous, to clarify exactly what was onerous, so that NT could review what it had done, and perhaps change the model. It was noted that officials on the ground had different levels of understanding and information.

Mr Smith said that he was amazed that there were around 1 500 questions being posed to NT every year. He asked who was responsible for coordinating a Monitoring and Evaluation Unit. He had understood that DPLG might be doing this. He asked whether anyone in government was responsible for monitoring and evaluation across the whole of government.

National Treasury responded that it would keep promoting the line that it could help to put a template together, and suggest to municipalities that they, as well as NT, put matters up on the website to lessen the number of calls. That strategy was bearing fruit. The Committee that considered the matters included representatives from DPLG and many other departments. The Committee was co-chaired, with the chair rotating depending on whether financial or non financial information was being considered. All departments had the research results and were asked how to work in implementing the problems. He said that one question on the budget could be asked in twenty different ways. The challenge was that research would have to be focused in a certain way to answer each question. He noted that there were some shared links already set up as part of the strategy. In addition, the working group had considered whether one person could be identified for information, and whether this function could be shared.

Mr Smith noted that MFMA took effect in 2004 but that qualitative improvements would only be shown in the next three to eight years. He asked why there was this five year difference, if it was linked to the phase-in of high, low and medium capacities, and if after eight years one could say that there was full and effective implementation.

National Treasury officials responded that during the phase-in, the early and most important parts of the legislation were investigated. The first requirement was that at least the budgets must be tabled on time. The budgets were being so tabled, and there were good budgets in some municipalities. In others, where the phase-in was not yet required, this was not yet being done. NT was providing tools by way of simple spreadsheets. Targeting was linked to phase-in. Low capacity municipalities were required to produce less than the high-capacity municipalities.

Mr Smith said that the issue of low capacity municipalities was interesting. Taking into account all interventions, he asked what was the turnover of those being trained, whether they stayed in the sector or moved to the private sector. On the ground there was no sense that capacity was improving, particularly in financial management.

This question was partially answered with the later questions around the training interventions.

Mr Smith referred to the credit ratings of municipalities and noted that Johannesburg seemed to access the bond market. He wondered why that was so. One of the issues addressed in 2003 was how to ensure that the better capacitated municipalities could access financing through the bond market.

National Treasury indicated that it would not like any municipality that did not have its financial affairs in order to go and access financing in any way. Johannesburg had a good team and was able to deal with this issue properly. Tshwane and City of Cape Town and other large cities with critical mass could perhaps be ready to enter into the bond market. Management of the cash was another issue. This was a process, and progress would be made.

Mr Smith said that he would like to have clarity on the difference between formal and informal interventions. One was described as an intervention via the Constitution and one as intervention through the MFMA.

National Treasury indicated that the formal interventions were those in terms of Section 139 of the Constitution. Informal ones were those where there were financial problems and support was provided by NT.

Mr W Doman (DA) asked if the NT could take remedial steps in respect of reporting.

Mr Doman asked whether stricter requirements would be put in place in terms of submission of annual financial statements.

National Treasury indicated that it had issued an exemption notice last year giving extensions to lower capacity municipalities. Some said they would be on time, but closer to the date there were requests for deviations. There were likely to be more still coming through. The Auditor General was also playing a more vigilant role in expanding the scope of audits. It could be that there was poor planning that prevented financial statements being submitted on time. NT required municipalities, before the end of June, to prepare an audit file, and set out the contents of this file and the processes leading to it. A circular had been issued. Regrettably municipal officials tended to be taken away from their core functions by national conferences often scheduled for this time.

Mr Doman asked how NT would assist the municipalities to apply for the credit rating, and what would they be asked.

National Treasury officials responded that NT had secured donor funding to assist municipalities to work through a credit rating. The normal credit rating questions would be used to cover a range of issues.

Ms L Mashiane (ANC) noted that in the rural municipalities projects might not be implemented. She asked, when municipalities gave in their budgets, whether they were using Integrated Development Plans (IDPs) or whether the IDPs were submitted after budget. She noted that in her constituency shops were supposed to be built with state funds, yet the vendors were not able to move in.

National Treasury officials indicated that NT was currently looking at how to ensure that priorities found their way into the budgets. Some IDPs were done by people who were not residing in the municipality, although all matters in the IDP should be interrogated by the Council, who should have a reality check. This was addressed during the workshops. It would take time to improve the quality. NT said that the research had only been able to check 18 municipalities so could not estimate the percentage of IDPs and budgets correlating with each other. NT was constantly suggesting that if there was not provision for items in DORA and national legislation, they should not be put in the budgets. The municipalities should not be creating expectations that they could not fulfil. NT would like councillors to play a greater role in implementing the MFMA, and should interrogate the documents produced by the officials, asking when exactly matters would be implemented.

Ms Mashiane queried why in 2006/7 there had been such low figures for submission of reports. She also asked why the municipalities were not displaying certain information on their websites. She asked if this was due to lack of information or training.

National Treasury confirmed that website information must be improved. If the municipalities did not themselves scrutinise their websites, they would not know what still needed to be put up. All public information should be on the website within 7 days. NT asked that if the skills were not in place already, then a person should be appointed to rotate in the district.

Mr M Phadagi (ANC) spoke on the number of vacancies, and asked for clarification on the increase. He asked if that was due to the election, or shortage of skills, or contract expiry.

National Treasury responded that the research suggested that in a number of instances contracts had expired. Unfortunately the five-year expiry dates often coincided, which was the reason for the large dips in the graphs at certain points. Vacancies were also more pronounced during the election cycle. In some municipalities, however, there had been good continuity, such as E-thekweni. When top management was replaced, there was also unease amongst junior officials. 

Mr Phadagi asked about the use of provincial and municipal advisors. He asked how many mentors were deployed, and whether they were sent only to selected municipalities, in which case he asked how they would be selected.

Mr Likotsi asked for clarity on the impact of the use of interns, and what would be done with them once the internship was over.

Mr I Mogase (ANC) asked how long the training took and what were the successes.

National Treasury responded that municipal finance management internship guidelines were issued, to guide selection of interns, their core study subjects, and the need to try to identify in-house people to groom for promotion. Mentors should be senior personnel with experience. All those who had been deployed to municipalities were being used, but mentorships were not limited only to those advisors, and would also include senior officials at the municipality. It was clear that interns should not be trained, then immediately move to the private sector. Ideally they should be appointed permanent municipal employees. If there were no vacancies, they should be absorbed to neighbouring municipalities, or, if this was not possible, their contracts should be extended for a further year. The training was unit-standard based. Initially the officials would attend contact sessions for four or five days, then do work-based assignments in modules. There was continuous feedback from the providers.

Mr M Likotsi (APC) said that the research outcomes had suggested corrective measures and that cooperation must be obtained. He asked what would result if they did not cooperate.

Mr Likotsi noted that the punitive mechanisms could include withholding of funds. He asked what negative impact this would have.

National Treasury responded that at the same time that it offered support it would have to take into consideration the root causes, and how far it would have to intervene and provide support, as well as the sustainability of what it was doing. MFMA did address some issues such as lack of cooperation.

The Chairperson noted that Section 139 set out three day periods. He commented that the initial steps of providing support were very useful.

The Chairperson said that the effort put in to ensure implementation was very interesting. He wondered if there had been any similar tabling of implementation efforts in regard to any other pieces of legislation. Lack of quality in information from municipalities often arose from their own lack of research. He therefore asked to what extent NT was collaborating with others to set up information systems.

The Chairperson also referred to collaboration that was emerging between Local Government and Treasury. He asked whether NT was giving any support to build the capacity of provinces to carry out their work. He wondered if in fact capacity should be developed at national level, or whether it should be at the provincial level.

The Chairperson noted that when municipalities failed to pay attention to sustainable development or environmental matters, there would be financial and non-financial costs. Part of the commitment to sustainable development required an indication, in the Annual Reports, as to what municipalities were doing. He asked if any studies had been done on this, and if there had been any studies as to whether any adverse consequences could have been avoided.

National Treasury indicated that this would be taken forward to the annual report project.

The Chairperson hoped, in relation to Section 71 reporting, that mayors, having received the reports, were dealing with the issues arising.

The meeting was adjourned. 

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