2006-2007 Audit Outcomes of Municipalities: Auditor-General & Accountant-General reports

NCOP Finance

19 August 2008
Chairperson: Mr T Ralane (ANC, Free State)
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Meeting Summary

The Accountant-General and the Auditor-General briefed the Committee on the 2006/2007 audit outcomes of municipalities. It was noted that of the nine provinces, only four provinces (Western Cape, Gauteng, Northern Cape and Mpumalanga) had submitted their financial reports on time. Limpopo (53%) recorded the lowest percentage of submissions.

The Accountant-General said that many municipalities did not have the internal capacity to adequately manage their financial reports, but did note that there had been a slight improvement by provinces in terms of adverse opinions and disclaimers. He said that the interventions made in Western Cape and Gauteng had been important as delegated municipalities were no longer in existence, regular workshops were held, strong leadership and support was forthcoming from the provincial government and National Treasury, and in Gauteng retired experienced officials were deployed to municipalities to provide assistance.

The Auditor General had identified six best practices indicators, which he outlined. Many municipalities had problems with compliance as they did not have the relevant capacity to address their challenges. Lack of proper oversight and supervision was also identified as problematic. He urged municipalities to cease their suspicion of deployed officials, and said that political officials should enforce proper management of public funds entrusted to them.

The Chairperson called upon the various MECs or Heads of Department of provincial departments that were present at the meeting to give an indication of the workings of their units. Several cited lack of capacity, the need for funding, positive outcomes resulted from increased interventions by other role players. They also mentioned the fact that the local municipalities were not seen as attractive job prospects and political infighting as constraints>
The Auditor General commented briefly on the report-backs, noting that his Office did hold one-on-one meetings with municipalities, and urged that municipalities should try to acquire strong Chief Financial Officers and apply the guidelines in order to improve their financial management.

Members agreed that there was a need for drastic action, and welcomed the ideas. National and Provincial Treasuries were urged to enhance their roles further. It was unacceptable that service delivery could be compromised.

Meeting report

Opening Remarks
The Chairperson said that the Auditor-General's (A-G) report on municipalities did not paint a very good picture in terms of financial management. This meeting was convened to discuss the problem of financial management and to find solutions. He added that it was very important to assess whether National Treasury (NT) and the Department of Provincial and Local Government (DPLG) had adequate support mechanisms in place for those troubled municipalities, as R200 million had been allocated via the Division of Revenue Act (DoRA) for capacity building and support.

Accountant-General’s briefing
Mr Freeman Nomvalo, Accountant General, said that since the inception of the Municipal Finance Management Act (MFMA) and other related legislation related to municipal governance there had been some progress in certain areas of financial management in municipalities. This progress should provide the foundation for a more radical improvement strategy from a financial management perspective.

Mr Nomvalo noted that municipalities had been instructed to submit their budgets 90 days before the beginning of the new financial year so that adequate budget allocations could be made. Problems persisted as some municipalities did not submit their budgets and business plans, which made it very difficult for NT to assess their needs. Most of the plans and budgets were approved before June, with a slight increase to 80% just before the financial year commenced.

He added that there had been an improvement in oversight reports, as well as progress made in making those reports available. The importance of monthly and quarterly financial statements was emphasised as an important step towards sound financial management.

He stated that 276 annual financial reports had been submitted, of which 253 had already been audited by the A-G and sent back to municipalities. Seven municipalities did not submit their annual financial reports, which added to the backlog that the A-G had been experiencing with municipalities.

Of the nine provinces, the Western Cape, Gauteng, Northern Cape and Mpumalanga were the only provinces that had all of their municipal financial statements submitted. Limpopo (53%) and the Free State (76%) recorded the lowest percentages for submission of annual reports. Mr Nomvalo noted that it was unacceptable that added resources that could be utilised for service delivery were instead spent on fixing incompetence at local government level

He stressed that during the 2005/2006 financial year, the A-G had given 24 adverse opinions in comparison with 22 for the 2006/2007 financial year. The number of disclaimers had also improved from 117 in 2005/2006, to 101 in 2006/2007.There had also been a modest overall improvement in all categories of audit opinion, with 23% of municipalities having been given unqualified reports, and 28% with qualified reports. 50% received disclaimers of audit opinions, as some municipalities did not keep relevant records, making it difficult for auditors to conduct a proper audit. The document that he tabled set out the statistics (see attached presentation)

The Accountant-General said it was important for Members to consider what had been done differently in provinces such as Gauteng and Western Cape, to ensure total compliance with oversight mechanisms. He stated that the Western Cape Government had done away with delegated municipalities, and that they hosted regular workshops where all the municipalities interacted and shared information with each other. The provincial government and NT also provided strong leadership and support.

In Gauteng, the Member of the Executive Council (MEC) for Local Government had started a forum where problems and suggestions had been discussed on regular occasions. The provincial government had also deployed retired experienced officials to municipalities to provide assistance.

In order for municipalities to conduct sound financial management, the A-G had identified six best practices indicators that should be useful. These indicators included: the need to have quality information produced regularly and on time; the availability of key officials to answer questions and produce the relevant documentation; the availability of supporting documentation; compliance with risk management and good internal control and governance practices; supervision; and strong leadership from the executive and bureaucracy.

He added that about 36% of municipalities did not have problems with making supporting documentation available. 18% submitted financial reports of good quality. 23% of municipalities did not submit their financial statements on time. Many municipalities had major problems with compliance as they did not have the relevant capacity to adequately address the challenges at hand, and thus made use of consultants.

One of the factors that contributed to the problems municipalities faced could be attributed to a lack of proper oversight and supervision, as many officials did not have the relevant skills to act in an oversight capacity. It was important that this be rectified as soon as possible.

The Accountant-General added that the policy directives had been clear on pertinent issues related to financial management. Municipalities should stop viewing those deployed by the NT and the DPLG as spies. Political officials should step up to the plate and enforce proper financial management of public funds allocated to them.

The Chairperson noted that the Constitution was clear on the role and function that provincial and national government had to perform in support of local government structures, and noted that the NT and the DPLG had to be proactive in their engagement, instead of waiting on municipalities to ask for assistance. He said that consistent engagement, as evidenced by Western Cape and Gauteng, seemed to have paid off handsomely He added that it was important to establish what had to be done to bring other municipalities on a par with those in the Western Cape and Gauteng.

He asked the various MECs and Heads of Departments (HoD) present to give an account on whether their Municipal Assistance Units had been adequately staffed and trained.

Eastern Cape
Mr Sindisile Maclean, Head of Eastern Cape Department of Local Government and Housing,  said that in the past there was no dedicated municipal support unit, as engagement with municipalities was done in an ad hoc fashion. Recently, the MEC for Local Government had introduced a  support and intervention framework. This would give clear guidelines on policy directives that need to followed, to ensure compliance with the MFMA and Public Finance Management Act (PFMA). A General Manager would head this unit. The MEC also proposed that another wing be created to act as an early warning system so that the MEC could  provide assistance immediately. The MEC did provide additional funding for this combined intervention.

Mr Sam Ngubane. Head of Mpumalanga Department of Local Government and Housing, said that Mpumalanga had received assistance from the Mpumalanga Provincial Treasury as well as from headquarters. The provincial government had ensured that collaboration between Treasury and local government took place, as well as continued assistance to municipalities

He added that Mpumalanga was ready to learn from  best practice directives  and that there had been some movement within  municipalities due to the assistance and intervention by the relevant role players.

North West Province
Mr Howard Yawa, MEC for Public Works, North West, said that his province had a problem with capacity as well, and that currently it had four people to man the Municipal Unit. The  problem was not only with capacity building, but also with programme funding. Some municipalities recorded very high vacancy rates. He stressed the importance of intervention as being the first step in addressing these problems, and said that capacity building thus would be a direct spin-off of this intervention.

Free State
Mr Kopung Ralikontsane, Head of Free State Department of Local Government and Housing noted that his department, in conjunction with Provincial Treasury, had provided support to municipalities, especially in the area of capacity building. NT had been asked for additional funding to address this problem as the Free State had experienced problems with the budget after the finalisation of the demarcation process.

Mr Ralikontsane noted that the Free State only recorded one municipality that received a qualified report, and that the provincial government had entered into a Memorandum of Understanding with the various government departments and municipalities to address pressing issues. His province had a dedicated MFMA Unit that dealt with local governance.

He added that one of the main problems related to municipalities who did not keep records of pertinent documentation, but this would soon be a problem of the past as it would be addressed in earnest. He admitted that the province also had capacity constraints.

Kwazulu Natal
Mr S Magagula, Senior General Manager: Resource Management, Kwazulu Natal (KZN) Treasury, said that his department had provided both financing and other forms of support to local government structures. There was a view that implementation of the MFMA did not come with sufficient funding.

He added that the KZN Treasury had a dedicated unit, the Municipal Finance Unit, which deployed key staff members across the different units of the Treasury to adequately address financial management issues. There had been a problem with capacity within municipalities.

The fragmented political situation in KZN had also not helped the situation as politics often got in the way of proper and adequate service delivery. It was noted that in most cases deployed individuals were viewed with suspicion by municipal authorities and that it was difficult to assist rural municipalities, as people did not want to apply for jobs in these municipalities due to their geographical location.

Ms H Krisnan, General Manager: Municipal Finance, KZN Department of Local Government and Traditional Affairs, noted that many municipalities had limited capacity to adequately address the problems they faced and that they relied on external support. The MEC for Local Government did indicate that a revised plan to expand on municipal finance support would be extended to the support unit to adequately address the issues at hand, and that officials would take charge of the different districts and provide capacity building as well as other support. She added that emphasis had been placed on shared service delivery and audit committees, and that this arrangement had worked well to a certain extent, even though the province had been dogged by political infighting.

Municipalities had also been instructed to work closely with the South African Local Government Association (SALGA) to try to address further problems through a focused process that would also provide support on asset and debt management.

Western Cape

Ms S Majiet, Administration and Support Manager, Western Cape Department of Local Government and Housing, noted that the Western Cape Provincial Government had primarily focused on the intensity and scope of intergovernmental partnerships in addressing financial management issues. Here, ideas were reconstructed, and subsequently would be adopted as policy directives to improve financial management at local government levels.

She added that it was a very difficult task. The Western Cape had an ongoing process to support and intervene where necessary, as it could not allow itself to become complacent. Those key municipalities with huge economic development potential who had received qualified reports from the A-G would be assisted in depth.

Mr J Stigmaan, Head of Department: Provincial Treasury, Western Cape, noted that it was important to have strong intergovernmental relations and proper oversight monitoring mechanisms to ensure effective financial management. Municipalities had been divided into two groups to facilitate better intervention and dialogue.

He stated that in the Kannaland Municipality the intergovernmental relationship between the Provincial Treasury and the Department of Local Government had worked well, as full training and skills development workshops had been conducted. These had enabled the sharing of information and ideas on budget processes, priority planning, and issues that related to the Integrated Development Planning (IDP). He added that regular or periodic visits to municipalities had also played an important part in the Western Capes sterling performance with regard to local government financial management.

The Chairperson noted that he found it very surprising that provinces that did not have the same political issues as the Western Cape did not make the grade, as they should have, and this showed that the Western Cape had competent officials, even though it had to contend with political instability.

He added that the North West, Limpopo and Mpumalanga had raised the issue of bias, as the A-G reports did not reflect the real situation in certain municipalities. He asked whether this meant that the A-G had a problem with capacity.

Mr Terence Nombembe, Auditor-General, Office of the Auditor-General, replied that the he was pleased to hear these observations by the Chairperson. He thanked the Committee for convening the meeting, as the A-G had to perform oversight through the mechanisms provided by the National Council of Provinces (NCOP).

Mr Nombembe noted that his office had regular one-on-one meetings with municipalities to ascertain what problems they were experiencing, and to try to find the best way forward in addressing these problems. This engagement had led to a better understanding between municipalities and the A-Gs office as to what was required. He added that there had been a greater commitment by mayors and councillors to enforce policy directives that would better facilitate sound financial management.

He said that if a municipality had a strong Chief Financial Officer (CFO), who was pro-active and fulfilled his or her oversight role, and who had the proper documentation and records, then it was indeed possible to achieve an unqualified report. He added that the role of the local Council, and their proper understanding of their functions and roles, was also an important step that could achieve an unqualified report.

Mr Nombembe informed the Committee that his office did not have a capacity issue as such, and that Limpopo had been the only province that had major delays. He said that he would not comment on the accusations made by the North West, Limpopo and Mpumalanga.

Mr D Botha (ANC, Eastern Cape) said that the internal problems that provinces experienced impacted heavily on poor performances by municipalities and made it difficult for officials to perform their assigned functions.

He added that it was unacceptable that municipalities failed to produce pertinent documents, and that a CFO of a municipality should be pro-active and available if needed. The problem was exacerbated because many municipalities either had an Acting CFO, or no CFO at all.

Mr Botha noted that the relevant government departments had to form various task teams that could be deployed to problematic municipalities, and not just find short term solutions, because local government formed an integral part of service delivery at municipal level.

The Chairperson stated that dedicated funding (R200 million) had been made available via the DoRA for the appointment of competent CFOs for municipalities. It was thus unacceptable that some municipalities had not made use of these funds to appoint competent CFOs.

Mr E Sogoni (ANC, Gauteng) said that he was glad that this meeting was now finally taking place, as it should have been done a long time ago. The improvements that both the A-G and the Accountant-General had alluded to should show even greater improvement.

Mr Sogoni added that section 24 of the Constitution was not ambiguous in terms of the provisions that compelled national and provincial spheres of government to provide support to local government structures.

In many of these provinces many officials and politicians tended to be indifferent to what was happening in their provinces. He believed that drastic action had to be taken to ensure that they did show interest.

Mr Sogoni stated that those provinces that recently implemented their support units had to accelerate the process, as it was evident that many officials who had to implement the policy directives of the MFMA did not understand what was required of them. He welcomed the idea of pairing municipalities into districts, but sounded a note of caution about the capacity constraints and other related issues that might arise from this. In addition, he requested that both NT and Provincial Treasuries should enhance their role even more, in order to secure success.

The A-G noted that his office was due to submit a report on municipal financial performance to the National Assembly. This would include a detailed comparative analysis to ascertain whether there had been major improvements.

Mr T V Pillay, Chief Director: National Treasury, said that NT expected municipalities to submit quality reports that could be easily audited. Municipalities had to focus on their budgets first, before problems around the quality of reports and lack of information could be addressed

He added that the NT had been happy to see that some improvements were made, but that more collective engagement and Council oversight was needed before real progress could be made. It was also important to ensure that municipalities utilised the provisions contained in the Competency Framework, as this dealt with the deployment of relevant skills to the correct areas.

Mr Pillay stated that he failed to understand why municipalities did not utilise the Municipal Structures Act and the Municipal Systems Act, as they could be read in conjunction with the MFMA.

Ms Toko Xasa, MEC for Local Government and Housing, Eastern Cape, thanked the Committee for convening the meeting. She said it had been very helpful, and added that there was indeed political will to create a foundation for monitoring and compliance. She said that the main problem in the Eastern Cape lay with the grading of municipalities, as people had been reluctant to apply for posts advertised by
lower graded municipalities. She added that that the Eastern Cape wanted to pull all of its skills together to address the problems and assess and implement the Performance Agreement that dealt with the Municipal Managers performance evaluation.

Mr S Mtileni, representative of South African Local Government Association (SALGA), said that he supported the view expressed by the MEC, as many smaller municipalities experienced problems in filling their vacancies. The municipalities had to maximise their resources.

The Chairperson noted that district cooperation had to be equal to avoid the creation of
monsters and that adequate funding had to be obtained to ensure that service delivery was not compromised. He noted that the Gert Sibande Municipality in Mpumalanga that had been plagued by chronic underspending and a lack of capacity.

Mr J Mahlangu, MEC for Finance, Mpumalanga, said that he agreed with the findings of the A-G and that the provincial treasury had to assist Mpumalanga in achieving the objectives articulated in the A-G’s report. He added that weaknesses had to be strengthened and that the DPLG and SALGA had to provide in-depth assistance that could provide a more focussed approach.

He added that the Gert Sibande Municipality received the highest concentration of financial intervention and assistance, but the provincial government could no longer provide adequate assistance, due to a lack of funds as well as engineers. It was noted that the local Sasol plant had not yet approached the municipality with its views on the possibility of “loaning” their engineers to the municipality

Mr B Mofokeng, Senior Manager, North West Province Department of Local Government and Housing, said that his province was still building capacity in terms of shared service arrangements with districts, and that in most cases smaller municipalities had to rely upon and ask for permission from the district municipalities if they wanted to implement certain policy directives. He added that a concrete Memorandum of Understanding was needed that would outline the directives for shared service delivery and cooperation.

Mr S Letsholo, Manager: Municipal Finance, SALGA, stated that SALGA had decided to implement a course that would assist councillors in understanding what their responsibilities were.

The Accountant General noted that everything possible had to be done to ensure that municipalities got the relevant assistance. He said that clear and defined directives were necessary to solve the dilemmas, and that municipalities had to have access to additional capacity, whether shared or by a service provider.

He added that his office had developed a tool that would assist municipalities in accessing their weaknesses and strengths by answering various questions. This tool would enable his office to draft and implement the relevant directives that were needed by municipalities. He also emphasised the importance of proper oversight mechanisms.

The Chairperson thanked the various departments for their input and said that it was critical that the necessary capacity was available to municipalities to better service delivery. He added that it was necessary to implement mechanisms that would ensure that collaboration did take place.

He added that many municipalities would get a shock if they were aware of the fact that many of their budgets would decline significantly, whereas the Municipal Systems Improvement Grant allocations would increase. This was problematic, as many municipalities did not even spend their initial grant allocations.

He invited the relevant role players to a meeting on 26 August.

The meeting was adjourned.


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