The Standing Committee on the Auditor General met in person to receive a briefing from the Auditor-General of South Africa on the outcomes of the 2021/2022 local government audit.
Of the 257 audited municipalities, only 38 (15%) had received clean audits, and 21 of those were in the Western Cape. Six municipalities (2%) had received adverse audits, 15 municipalities (6%) had received disclaimers, and 16 audits (7%) remained outstanding. However, 91% of auditees had submitted their financial statements timeously, an improvement from 81% in the prior audit period. The Auditor-General had identified 268 material irregularities, accounting for an estimated R5.19 billion in material financial losses, and had recorded a further R4.74 billion in fruitless and wasteful expenditure.
Concerns flagged by the Auditor-General included the inefficient use of external consultants; insufficient investment in infrastructure management and maintenance, including for water-treatment facilities; widespread financial distress; and poor financial planning. 88% of municipalities lacked effective compliance controls, and 44% had unfunded budgets. Overall, municipalities were not improving at the requisite pace, which the Auditor-General attributed mainly to three root causes: inadequate skills and capacity, governance failures, and a lack of accountability and consequence management. The Auditor-General called for a strong response by municipalities, by provincial government, and by national government.
Members commended the professionalism of the Auditor-General, but they were in uniform agreement that the Auditor-General’s findings were extremely concerning. They identified inadequate skills and weak political leadership as key obstacles to municipal service delivery, with some Members worrying that coalition governments had led to instability in certain municipalities. The Committee also discussed the need to improve collaboration between the spheres of government and between district and local municipalities and the need to reduce or optimise the use of external consultants.
The Committee discussed several preliminary proposals for responding to the report. Suggestions included reviewing legislation, either to enhance the Auditor-General’s powers or to provide for departments to intervene more easily in municipalities; meeting with various stakeholders, including Cabinet, the National Treasury, the Department of Cooperative Governance and Traditional Affairs, and provincial departments; and undertaking oversight visits to municipalities. The Committee would discuss these proposals further in later meetings, and would also receive a further report from the Auditor-General on material irregularities.
The Chairperson said that the only item on the agenda was the report of the Auditor-General of South Africa (AGSA) on the outcomes of its 2021/2022 audits of local government, conducted in terms of the Municipal Finance Management Act (MFMA).
AGSA briefing: MFMA findings for 2021/22
Ms Tsakani Maluleke, Auditor-General, AGSA, said that AGSA had audited 257 municipalities. Of those 257:
• 38 (15%) received clean audits;
• 104 (40%) received unqualified audits with findings;
• 78 (30%) received qualified audits with findings;
• Six (2%) received adverse audits with findings;
• 15 (6%) received disclaimed audits with findings; and
• 16 (7%) audits were outstanding.
The number of clean audits had decreased from 41 in 2020/21. However, timely submission of financial statements had improved, from 81% to 91%. Of the 16 outstanding audits, three were delayed by non-submission of financial statements, 12 were delayed by late submission of financial statements, and one faced other delays by the auditee.
The best-performing province was the Western Cape, where, of the 30 municipalities audited, 21 municipalities (70%) had received clean audits and six (20%) had received unqualified audits with findings. Improvements were not happening at an ideal pace, and it was important for provincial governments to take responsibility for local government.
In respect of financial planning, AGSA observed the following in the 2021/2022 financial year:
• 112 municipalities (44%) had unfunded budgets;
• 175 municipalities (68%) had unauthorised expenditure, amounting cumulatively to R25.47 billion; and
• 203 municipalities (79%) had insufficient budget for infrastructure maintenance.
Financial controls were also inadequate, with 88% of municipalities lacking effective controls for reviewing and monitoring compliance and 87% lacking effective controls for in-year and year-end reporting. AGSA had recorded a total of R4.74 billion in fruitless and wasteful expenditure and estimated that R5.19 billion had been lost due to non-compliance and fraud material irregularities (MIs).
Infrastructure management was insufficient due to poor financial planning and controls. There was a lack of skills and capacity to deal with financial planning in local government, and AGSA was not seeing the impact of internal audits. Municipal councils were politically unstable and were not equipped or disciplined.
The vast majority of municipalities (216, or 84%) used external consultants for financial reporting, primarily due to a lack of skills or vacancies in key positions. The use of consultants was not itself a problem, but external expertise was not being used efficiently by local governments, because consultants’ work was obstructed by inadequate review or inadequate municipal records. 137 financial statements (62%) included material misstatements in areas in which external consultants had worked.
Financial distress in local government
Poor financial management was putting pressure on local government finances. Not enough was being spent on key government functions, due to high expenditure on salaries, ill discipline in billing, and a failure to collect debt. The credit ratings of four metropolitan municipalities had been downgraded, which would increase the operating costs of those municipalities in the future. Many municipalities had poor payment practices toward their creditors. Procurement was a site of leakage for municipalities, and AGSA did not receive complete documentation for all procurement contracts.
Service delivery failures
Performance planning required improvement. Expenses were not budgeted for unless they were planned for. Municipal performance plans frequently failed to include key targets for the provision of water and sanitation, energy and electricity, and housing and community facilities. Infrastructure management and maintenance were particularly problematic, especially at wastewater treatment works.
Performance reporting frequently lacked credibility, with 179 performance reports (76%) receiving findings upon submission and 139 performance reports (58%) receiving findings even after audit adjustments.
There was a lack of discipline and commitment to legal compliance in local government and a lack of consequence management, creating a culture of transgression. AGSA had flagged 268 MIs on non-compliance and fraud. In 87% of matters, no action had been taken to address the problem until AGSA had issued notifications. However, this indicated that the MI process was making an impact.
Overall, AGSA believed that there were three root causes of the poor state of local government: inadequate skills and capacity, governance failures, and a lack of accountability and consequence management. Ms Maluleke concluded with a “call to action” and eight recommendations to address the problems identified in the audit report.
(See presentation for details.)
The Chairperson said that the report presented a sorrowful story of local government. While the financial aspects of the report were also important, the performance of local government was critical. Tshwane was an example of a municipality that had poorly maintained infrastructure because of a failure of planning. A number of people have died due to polluted water services. AGSA’s report touched on critical elements that presented a call to action. These critical areas had to be addressed to strengthen local government. The framework of the accountability ecosystem encapsulated this – if one element failed, the entire system collapsed.
Ms Z Kota-Mpeko (ANC) said it was scary how much work there was to be done. AGSA had painted a clear picture of what should be done. She wanted to focus on the root causes, which were inadequate skills, poor leadership, and over-reliance on consultants. Many people depended on local government, at a time when there was no uniformity in local government. Municipalities used to have a clear plan in the form of an Integrated Development Plan (IDP), but that was something of the past. Local governments had to achieve value for money. Municipalities simply did what they wanted to, because there was no strong hand directing them. This had to stop, as people wanted services now.
Mr N Singh (IFP) said that if anyone did not become emotional about this matter, there was something wrong with them. After AGSA had briefed the Committee in preparation for this report, he had looked forward to it with trepidation. All of the Members’ fears had been justified, because there had been little or no progress. The only hopeful note was AGSA’s performance and efficiency – AGSA was doing more than local and national officials. The Committee’s role was to ensure that AGSA was fully equipped with the financial and human resources to continue its work. He hoped the press would give AGSA coverage so South Africans could see today’s presentation. People on the ground needed to know what kind of governance was happening in their local municipalities. He appreciated AGSA’s incredible work.
He said that the mission statement was “building confidence”. For whom were they building confidence? Perhaps AGSA needed to look at the mission statement. Maybe AGSA was building confidence, but others were not. Many consultants took municipalities for a ride. They gave bribes and did not do the work they were supposed to do. Many of them delayed their work to make those councils financially dysfunctional. Where were internal audits in local municipalities?
He suggested that perhaps there needed to be a meeting between the President, his Cabinet, Parliament, and other stakeholders, to sit down to discuss AGSA’s report and decide what should be done.
Only people with basic financial knowledge should be employed in municipalities, not their friends or family. Did AGSA need any additional powers to assist in its work? Continued good work by AGSA would provide South Africans with hope for local government. If Parliament did not address these problems, it would be failing in its responsibilities. Perhaps Parliament should look at how other countries, including other African countries, addressed such issues. He had been on this Committee for years and it was the same old story, except for the improvements in the quality of AGSA’s reports.
Mr Z Mlenzana (ANC) said that he was wondering where the Members would be this time next year. Given that there would be an election next year, it could be the last time this Committee received AGSA’s annual report. He thought that the Committee had done well regarding AGSA’s funding, but it could do more to look at the legislation of funding arrangements.
He had prepared questions in advance of the meeting, but AGSA’s report had answered those questions, which showed that the Committee and AGSA were in sync. Some people accused AGSA of colluding with auditees, which resulted in complacency. There had to be a way of monitoring the auditing teams sent to various municipalities – perhaps a rotation, so that more than one auditor was working with any given institution or municipality.
He was pleased to see progress in the presentation, but non-submission of financial statements was tantamount to a refusal to submit to an audit. Should that not be regarded as an MI?
He said that AGSA was doing on-the-ground oversight at local municipalities, which assisted the Committee. There had to be oversight of responsible municipalities, not only the negligent municipalities. AGSA’s report indicated that the Western Cape was the best-performing province, and he would not argue with that conclusion, but he urged that the Western Cape should also be subject to stringent oversight to ensure that municipal funds went where they were supposed to go. He was trying to avoid opening a discussion about whether the situation in the Western Cape was as good in practice as it appeared on paper.
He noted that local municipalities continued to rely on external consultants. However, one municipality had decreased its use of consultants and was now on the right track. Could AGSA provide a list of the municipalities that perpetually relied on consultants?
Was it not a criminal offence to file misstatements? Was it not criminal to submit a financial or performance report that you knew was inaccurate?
He concluded that he welcomed AGSA’s report, which would arm the Committee going forward.
Ms N Hlonyana (EFF) commended AGSA’s professionalism, which she said went “above and beyond” and was unusual in South Africa. She always looked forward to coming to Parliament to receive a report from AGSA.
She noted that 70% of municipalities expressed concerns over their financial stability. Did AGSA have any insight on what the solution might be? Some highly qualified people could assist these municipalities. The President had introduced a program for training young people to deal with water leakages, but there were still issues with water leakages. The problems with non-collections and payment for goods and services were not new to municipalities.
She was uncomfortable that unfair and uncompetitive procurement practices were reported as “limitation of scope”. Auditees hid documentation from AGSA in the knowledge that if AGSA did not see the problematic documents, the report would note a limitation of scope instead of theft or crime. For that reason, she hoped the wording could be changed.
She said that the “common indicators” were not so common in metropolitan municipalities. She did not want to blame the ANC, but the incumbent government had created a situation where municipalities were gaining metropolitan status to increase their salaries. Some metropolitan municipalities should not have that status. AGSA should ensure that all metropolitan municipalities are subject to the same indicators.
She was very happy that Ms Maluleke had touched on credible financial statements vis-à-vis the performance of municipalities. Financial statements were not always an accurate reflection of performance.
She thought that the current situation was a “gangsters’ paradise”. “Gangsters” in local government were making sure that nothing worked. Disorder in local government was used to steal from and defraud the municipalities. People had died of cholera, which could have easily been prevented. AGSA was like the sheriff and MIs were its AK-47s: if they were pointed in the right direction, accounting officers would comply. AGSA should be empowered so these “gangsters” could face criminal prosecution.
Ms M Matuba (ANC) suggested the Committee meet with National Treasury and local government over the issues that emerged from AGSA’s report.
She said nothing was wrong with hiring consultants, but auditees would not receive value for money unless they knew what they wanted. The problem was the initial planning at the IDP stage. If the person responsible for finances had not been involved in the IDP, there would always be friction between the financial statements and the IDP. If a consultant prepared financial statements without the municipality’s performance management unit, that would cause inconsistency between the financial statements and the performance reports. If leaders or municipal functionaries did not have basic accounting or auditing skills, they would not be able to consolidate or interpret financial reports.
She said that political parties had to take responsibility for the people they deployed to municipalities. Political parties had to call in their deployees and hold them accountable for such issues as compliance and service delivery. There had to be consequence management for politicians and administrators. AGSA reported that most financial statements were produced by external consultants – even in cases where the municipality had internal capacity.
Three district municipalities in the Northern Cape received clean audits. What had happened to shared services? Why were district municipalities not helping their local municipalities? If a district municipality achieved a clean audit, that should benefit all the subsidiary municipalities. Likewise, provincial governments should intervene to help municipalities. If a sphere of government was not fulfilling its role, Parliament had to be able to take drastic steps to improve the position of municipalities.
She said that businesspeople saw municipal assets as a way to make money. The water tank business was one example. The underlying problem was a lack of leadership. How did leadership respond? Municipalities had to invest in critical skills.
She suggested that it was necessary to introduce harsh measures to improve performance. It was “high time” to emphasise performance instead of mere financial statements. Quality financial statements did not entail good performance and service delivery. There had to be competent people in local government. Employers should take drastic steps against the incompetence of those responsible for advancing the professionalism of local government. If people did not take responsibility, irregularities would happen. The burden could not be placed on AGSA alone. For example, 44% of municipal budgets were unfunded. If a budget was unfunded, it should simply be rejected.
The Chairperson agreed that the report identified key areas that needed to be addressed going forward.
Mr O Mathafa (ANC) said that AGSA was doing a lot more than other stakeholders who were supposed to move local government forward. However, he did not agree with Mr Singh that Parliament should enhance AGSA’s powers, because that would simply amount to taking away responsibility from other institutions, thereby accepting their dereliction of duty. Instead of reviewing legislation to enhance AGSA’s powers, Parliament should review legislation to provide better options for other agencies – such as the Department of Cooperative Governance and Traditional Affairs (COGTA) – to intervene. Current legislation insulated municipalities from accountability. In addition, the Committee should identify some municipalities that were suitable for oversight visits.
Mr Mathafa asked whether some material misstatements were deliberate attempts to mislead AGSA and the public. Did AGSA have a way of investigating this and what mechanisms did it use to respond? In addition, was there a mechanism or process that AGSA could use to ensure that financial statements were submitted as required?
He agreed with other speakers that political accountability and leadership were important. What could be done to ensure that mayors also pulled their weight in ensuring that the financial management culture in local government was geared towards service delivery?
Ms P Mpushe (ANC) said that, unlike most institutions, AGSA based its report on ethnographic, evidence-based research. She appreciated AGSA’s professionalism. She also sat in the Portfolio Committee on Tourism, where Members did not get to see such levels of professionalism. Ms Maluleke, as the first female Auditor-General, was doing commendable work and AGSA was doing its best to help professionalise local government and ensure stability and service delivery. The report presented a “gloomy” picture, but, as Ms Maluleke had said, collaboration between different stakeholders could build resilient and responsive municipalities that provided quality services. The Committee had to support AGSA in exercising its oversight role.
She said there had been several protests in Makana Local Municipality, most recently by the students of Rhodes University, who objected to the condition of infrastructure, including roads and water services. Unstable coalitions sometimes caused such problems, insofar as councils were preoccupied with power struggles instead of with their mandate. She hoped that AGSA would see improvements and more stability in Nelson Mandela Bay now that a new executive had taken office.
On the municipal billing issue, she said that complacent and negligent personnel were a cause for concern, and she hoped that could be addressed.
Regarding the use of consultants, it was unfortunate that government’s service providers lacked a developmental orientation but were instead profit-driven. If a municipality lacked the necessary skills, the use of external consultants should be allowed, but there had to be a transfer of skills in such cases. If the necessary skills were available internally, the use of consultants should not be allowed. In any case, where consultants were used, monitoring and oversight mechanisms should exist.
On consequence management, she was pleased that AGSA had referred some cases to the Special Investigating Unit (SIU). The Committee should meet with the SIU and get updates on those cases.
Mr Mathafa noted that AGSA’s report had passed through Cabinet. How had Cabinet responded and had Cabinet made any commitments about possible remedies?
The Chairperson said that the Committee’s role was to protect AGSA’s independence and ensure the security of the auditing environment. The Committee should also provide key instruments to assist AGSA in performing its own work. Ms Maluleke emphasised the functioning of the accountability ecosystem. If provincial governments did not collaborate with their municipalities to ensure good performance, AGSA’s findings would reflect that failure. The legislatures approved funding to municipalities and there would be problems if the expenditure of those funds was not monitored.
He noted Ms Maluleke’s comments about failures of financial planning in the municipality. How could a municipality be allowed to operate if its budget was unfunded? If provincial or national departments had unfunded budgets, they were given a limited timeframe to address the problem urgently. Why were such restrictions not present at the level of local government?
He also noted the comments about the use of external consultants. The point was not to say that external consultants should not be used, but the AGSA highlighted deficiencies in how consultants were being used. How would a consultant complete his work if the municipality’s chief financial officer had not been documenting the municipality’s expenditure? This was partly the responsibility of consultants – they should not accept such work if they knew that they would not be able to complete it to an adequate standard. At the same time, some municipalities used external consultants to carry out basic functions – such as claiming VAT – that were the primary duties of the chief financial officer. For this, consultants were paid exorbitant fees from funds that should be used to provide municipal services. It was “criminal”. AGSA was correct in raising this issue. In the provinces, Members of the Executive Council should act if they become aware of such a situation in a municipality.
The Chairperson said that the Committee would need to engage further with parts of the audit, especially the MIs. Some MI notices might require the Committee’s attention, with the involvement of Treasury. There were proposals for the Committee to meet with COGTA and Treasury, as well as to visit certain municipalities and possibly meet with some provincial departments – Mpumalanga, for example, seemed to require attention.
Responses from AGSA
Ms Maluleke said that she would not be able to address all of Members’ observations and questions now, but she could direct Members to relevant sections of the report. She was sure that AGSA would have further opportunities to engage with the Committee, especially given that the law required AGSA to table its MI report with the Committee. The AGSA would soon compile a full MI report and talk the Committee through it.
She thanked Members for their compliments and support. She would pass on their feedback to the team that had worked so hard on this report. The Deputy Auditor-General would soon engage with the Committee on AGSA’s funding model and its capacity needs. Fixing local government would require all stakeholders to work together and for provincial and national leadership to engage with local government. The AGSA was inspired by the ownership taken at the provincial and national levels. Treasury had done phenomenal work around the frameworks, but also, importantly, around ways to monitor unfunded budgets and guide financial recovery plans.
It would help to visit municipalities that had received a clean audit, to get some insight into how AGSA helped those municipalities and what operating in a clean audit environment was like. Feedback from auditing teams suggested that municipalities with clean audits were distinguished by their discipline. These were municipalities that were ordered and responsive. That was how a municipality should function. Municipalities had to pay attention to financial resources and public participation, and match that to their capacity. They had to deliver and communicate effectively to build trust among citizens. It was also a good idea to visit the complacent municipalities, as they could be nudged in the right direction.
She suggested that stakeholders had to shift their expectations around what a public institution ought to look like. It was still about political leadership and leadership at an administrative level. It was leadership that determined professionalisation, service delivery, and consequence management. Leadership chose to respond to AGSA’s reports. AGSA had engaged all the stakeholders, at the provincial and national levels, and some of their input was included in the report. Other engagements would follow in due course. The invitation to engage on matters related to the irregular expenditure framework was a good thing. AGSA should engage in discussions about how to align and augment these frameworks, so as to safeguard transparency and accountability. Overall, the news contained in the report was difficult to accept, but it was a reminder of the urgency of the duties of AGSA and of Parliament.
The Chairperson said that AGSA had made brilliant proposals that the Committee would consider. He thanked AGSA for fulfilling its responsibilities, which were onerous. He appreciated that AGSA looked deeper at the performance of municipalities.
He said that collaboration between key stakeholders, such as Treasury and COGTA, was very important for taking this report forward. One could build skills, but instability at a local level was a big problem. Professionalism was also key, and Parliament should engage with the School of Government about creating a professional outlook. Parliament also needed to assess the impact of the training provided to chief financial officers. If leaders failed, how could they be held accountable?
The Chairperson said that the Committee was always here to support and defend AGSA, per the Constitution, without getting in the way of its work. Mr Mathafa had asked Ms Maluleke how Cabinet responded to AGSA’s report, but it was not necessary for Ms Maluleke to answer – she was not a public representative, and the Committee was better placed to engage with the relevant political leadership. AGSA was a Chapter Nine institution whose independence had to be protected vigilantly. The Committee would continue to look into actionable areas that emerged from AGSA’s report. He encouraged the media who were present to inform the public about the content of the meeting.
The meeting was adjourned.
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