Treasury releases local government revenue and expenditure report

Local government revenue and expenditure: Fourth quarter local government section 71 report for the period: 1 April 2022 – 30 June 2022

National Treasury has released the local government revenue and expenditure report for the fourth quarter of the 2021/22 financial year. This report covers the performance against the adjusted budgets of local government for the fourth quarter of the municipal financial year ending on 30 June 2022 and includes spending against conditional grant allocations for the same period.

The report was prepared by using figures from the Municipal Standard Chart of Account (mSCOA) data strings. The mSCOA Regulations were promulgated on 22 April 2014 and prescribes the uniform recording and classification of municipal budget and financial information at a transaction level. All municipalities and municipal entities had to comply with the Regulations by 01 July 2017. The mSCOA Regulations require that municipalities upload their budget and financial information in a data string format to the Local Government portal across the six mSCOA regulated segments.

The report is part of the In-year Management, Monitoring and Reporting System for Local Government (IYM), which enables provincial and national government to exercise oversight over municipalities and identify possible challenges in implementing municipal budgets and conditional grants.

The credibility of the information contained in the mSCOA data strings is a concern but is improving as the reform is maturing. At the core of the problem is:

• The incorrect use of the mSCOA and municipal accounting practices by municipalities;
• A large number of municipalities are not budgeting, transacting and reporting directly in and from their core financial systems. Instead, they prepare their budgets and reports on an excel spreadsheet and then import the excel spreadsheets into the system. Often this manipulation of data lead to unauthorised, irregular, fruitful and wasteful (UIFW) expenditure and fraud and corruption as the controls that are built into the core financial systems are not triggered and transactions go through that should not; and
• Municipalities are not locking their adjusted budgets or their financial systems at month-end to ensure prudent financial management. To enforce municipalities to lock their budgets and close their financial system at month-end in 2021/22, the Local Government Portal will be locked at the end of each month/quarter. System vendors were also requested to build this functionality into their municipal financial systems.

The Section 71 report facilitates transparency in reporting, better in-year management as well as the oversight of the financial performance of municipalities against their adjusted budgets. This report is, therefore, a management tool that serve as an early warning mechanism for councils, provincial legislatures, and municipal management to monitor and improve municipal performance timeously. The improvement of the credibility of the data strings is a priority for national and provincial treasuries and the submitted data strings are analysed monthly and errors are communicated to municipalities for correction.

Key trends:
Aggregate trends

1. On aggregate, municipalities spent 86.8 per cent, or R160.5 billion, of the total adjusted expenditure budget of R530.3 billion as at 30 June 2022 (fourth quarter results for the 2021/22 financial year). In respect of revenue, aggregate billing and other revenue amounted to 91.7 per cent, or R479 billion, of the total adjusted revenue budget of R522.6 billion.
2. Of the adjusted operating expenditure budget amounting to R463 billion, R412.8 billion or 89.2 per cent was spent by 30 June 2022.
3. Municipalities have adjusted the budget for salaries and wages expenditure at R137.4 billion (including remuneration of councillors), which is less by R598.6 million than the adopted budget of R138 billion reported in the third quarter of the 2021/22 municipal financial year. This constitutes 29.7 per cent of their total adjusted operational expenditure budget of R463 billion. As at 30 June 2022, spending on salaries and wages is 94.6 per cent, or R130 billion.
4. In the period under review, capital expenditure amounted to R47.7 billion, or 70.8 per cent, of the adjusted capital budget of R67.3 billion.
5. Aggregated year-to-date operating expenditure for metros amounts to R254.9 billion, or 93.1 per cent, of their adjusted operating budget expenditure of R273.7 billion. The aggregated adjusted capital budget for metros in the 2021/22 financial year is R29.7 billion, of which 70.9 per cent, or R21 billion, has been spent as at 30 June 2022.
6. When billed revenue is measured against their adjusted budgets for the core services, the performance of metros reflects a surplus for the fourth quarter of the 2021/22 financial year. This comparison excludes secondary costs incurred or actual revenues collected:

• Water revenue billed was R33.9 billion against expenditure of R33.3 billion;
• Energy sources revenue billed was R91.6 billion against expenditure of R82 billion;
• The revenue billed for waste water management was R10.2 billion against expenditure of R7.7 billion, and
• Levies for waste management billed were R12.1 billion against expenditure R10 billion.

7. As at 30 June 2022, aggregated revenue for secondary cities is 89.8 per cent or R65.9 billion of their total adjusted revenue budget of R73.4 billion for the 2021/22 financial year. A year-on-year comparison shows that the total revenue on average has decreased by 38 per cent when compared to the same period in 2020/21.
8. The year-to-date aggregated operating expenditure level of the secondary cities is 86.6 per cent or R58.3 billion of the total adjusted operating budget of R67.3 billion for the 2021/22 financial year.
9. When billed revenue is measured against their adjusted budgets for the core services, the performance of secondary cities reflects a surplus for the fourth quarter of the 2021/22 financial year for all services except water management. This comparison excludes secondary costs incurred or actual revenues collected:

• Water revenue billed was R7.8 billion against expenditure of R8.2 billion;
• Energy sources revenue billed was R25.1 billion against expenditure of R23.6 billion;
• The revenue billed for waste water management was R3.5 billion against expenditure of R2.8 billion; and
• Levies for waste management billed were R3.2 billion against expenditure of R2.4 billion.

10. Capital spending levels were at an average of 73.7 per cent or R5.2 billion of the adjusted capital budget of R7.8 billion.
11. Aggregate municipal consumer debts amounted to R255.4 billion (compared to R232.8 billion reported in the fourth quarter of 2020/21) as at 30 June 2022. Government debt accounts for 6.7 per cent, or R17.1 billion (R16.7 billion reported in the fourth quarter of 2021/22) of the total outstanding debtors. The largest component of this debt relates to households which account for 71.2 per cent or R181.8 billion (72.6 per cent or R168.9 billion in the fourth quarter of the current financial year).
12. Included in the outstanding debt is an amount of R219.2 billion, which is debt older than 90 days (historic debt that has accumulated over an extended period.
13. Metropolitan municipalities are owed R117.5 billion (R114.5 billion reported in the fourth quarter of 2020/21) in outstanding debt as of 30 June 2022. The largest contributors were the Cities of Johannesburg at 35.5 per cent, Ekurhuleni at 21.8 per cent and eThekwini at 16.4 per cent. City of Tshwane did not provide information on their debtors for this quarter.
14. Households in metropolitan areas are reported to account for R89.5 billion or 76.2 per cent of outstanding debt, followed by businesses that account for R23 billion or 19.6 per cent. Debt owed by government agencies is at R14.6 billion or 12.8 per cent of the total outstanding debt owed to metros.
15. Secondary cities are owed R55.9 billion (R44.8 billion reported in the fourth quarter of 2020/21) in outstanding consumer debt. The majority of debt is owed by households, which amount to R37.8 billion, or 67.7 per cent, of the total outstanding debt. An analysis by customer group indicates an amount of R48.6 billion or 87 per cent, has been outstanding for more than 90 days.
16. Municipalities owed their creditors R89.7 billion as of 30 June 2022 and provinces with the highest percentage of outstanding municipal creditors in the category greater than 90 days include Free State at 91.2 per cent, Northern Cape at 85.4 per cent, Mpumalanga at 84.7 per cent and North West at 73.8 per cent. An increase in outstanding creditors could be an indication that municipalities are experiencing liquidity and cash challenges and consequently are delaying the settlement of outstanding debt owed.
17. The total balance on borrowing for all municipalities equates to R61 billion as of 30 June 2022. This includes long term loans of R46.9 billion, long term marketable bonds of R8.5 billion, and other long term non-marketable bonds of R5.3 billion. The balance represents other short- and long-term financing instruments and other short-term loans.
18. As of 30 June 2022, the total investments made by municipalities equates to R37.1 billion. This is R400 million less than the R37.5 billion reported in the fourth quarter of the previous financial year (2020/21). Investments include Bank Deposits of R32.6 billion, guaranteed endowment policies (sinking funds) of R4 billion, Listed Corporate Bonds of R270 million and other smaller investments.
Over- and underspending
19. A net under performance against the budgeted revenue was R43.6 billion in the 2021/22 financial year. This indicates that municipalities were not able to bill and generate the revenue that it budgeted for, therefore, resulting in less funding available to cover the budgeted expenditure. Consequently, municipalities underperformed against the budgeted expenditure to align to the revenue generated and reduce the deficit.
20. A net total underspending of R69.9 billion or 13.2 per cent of municipalities’ total adjusted expenditure budgets was reported. Compared to the R42.9 billion recorded as net total underspending in 2020/21, there has been an increase of R26.9 billion year-on-year but this increase might be misrepresented by municipalities that do not submit their required data strings on time and the fact that many of the submissions do not contain credible data. The over- and underspending can be summarised as follows:
Analysis of Over and Under expenditure for the period 2018/19 - 2021/22

• Aggregate overspending of the adjusted operating budget – R5.8 billion or 1.3 per cent;
• Aggregate underspending of the adjusted operating budget – R56 billion or 12.1 per cent;
• Aggregate overspending of the adjusted capital budget – R1 billion or 1.5 per cent; and
• Aggregate underspending of the adjusted capital budget – R20.7 billion or 30.8 per cent.

21. Note that the aggregation of the capital and operating budgets into the total budget will result in a different outcome compared to analysing them separately.

Conditional Grants
Conditional Grants Expenditure as at 30 June 2022

22. The fourth quarter publication in terms of section 71 of MFMA provides the performance of conditional grant funding and various adjustments to the baseline allocations approved during the financial year.
23. The Minister of Finance approved the additional allocations, stopping and re-allocations to municipalities made in terms of sections 18 and 19 and the amendment to conditional grant frameworks in terms of the Division of Revenue Act, 2021 (Act No. 9 of 2021) (DoRA) as amended by the Division of Revenue Amendment Act, 2021 (Act No. 17 of 2021) (DoRAA). This publication covers these adjustment gazettes which make changes to the baselines of the allocations from the originally published DoRA.
24. When the mSCOA Regulations became effective on 01 July 2017 it impacted in the way on which municipalities must record their transactions and report on their financial performance. The low expenditure reported by municipalities is an indication that the mSCOA data strings submitted by municipalities are not credible and that municipalities are not complying with the mSCOA accounting and reporting requirements. Therefore, this publication noted the performance reported from both municipalities and their respective National Transferring Officers (NTOs). Notable differences have been observed in the reports received from municipalities and NTOs.
25. In terms of the reported conditional grant numbers by municipalities, all schedule 7 (indirect conditional grants), schedule 4 (supplementary grants), and the Equitable Share are excluded from the analysis because no expenditure is reported by municipalities on these grants. While supplementary grants are reported as part of the integrated operational and capital expenditure by municipalities, the indirect grants are never transferred to municipalities directly into their bank accounts. Expenditure of these types of conditional grants is done by the NTOs administering the conditional grants.

Total Conditional Grants Expenditure as at 30 June 2022

26.  As at 30 June 2022, a total amount of R37.4 billion has been transferred to municipalities against the adjusted direct conditional grants allocation of R37.4 billion.
27. NTOs reported expenditure of 80.6 per cent against the total adjusted allocation for direct conditional grants, while municipalities reported expenditure of 55.5 per cent against the R37.4 billion transferred to municipalities. The low expenditure reported by municipalities is an indication that, municipalities are struggling to grasp the mSCOA accounting and reporting requirements. In turn, during the 2020/21 fourth quarter, conditional grant expenditure reports reflect an inflated performance of 97.3 per cent of the total direct allocation in terms of the information submitted by municipalities.
28. Secondary Cities reflect an expenditure of 78 per cent, whereas metropolitan municipalities reported 71.2 per cent against the total revised allocation, just below the overall conditional grants performance of 80.6 per cent.
29. There are several factors that attributed to overall underspending of the conditional grants by municipalities in 2021/22 financial year. Some of these factors include the Covid-19 restrictions and the related delays on the procurement in the SCM processes, the November 2021 local government elections, the late submissions of business and implementation plans, amongst others. These factors also contributed to under performance of conditional grants and resulted in most municipalities having their allocaions reduced during the adjustments budget process.
30. Indirect conditional grants for both infrastructure and capacity allocated an amount of R7.1 billion to municipalities in the 2021/22 financial year and was adjusted upwards to R7.7 billion.
31. This was mainly due to an amount of R582 million which was rolled-over under schedule 6B (in-kind allocation) of the Regional Bulk Infrastructure Grant for operational payments for the Vaal River Pollution Remediation Project in Emfuleni Local Municipality.
Capacity and Other Conditional Grants Expenditure as at 30 June 2022
32. At the end of the fourth quarter, a total adjustment amount of R2.4 billion was transferred for capacity grants and expenditure of R1.8 billion or 77.4 per cent against the allocation was reported by NTOs, which is a decline compared with the same period in the last financial year, which was 80 per cent.
33. Municipalities reported expenditure of 48.5 per cent for the period under review. This is a significant variance between what municipalities have reported and what NTOs are saying during the same period. The low expenditure reported by municipalities may be because challenges due to mSCOA reporting requirements as the mSCOA was experimental at the time.
34. A newly introduced grant, the Programme and Project Preparation Support Grant (PPPSG) is allocated to the eight Metropolitan Municipalities. Since this is a new grant, the NTO’s June 2022 report indicated that municipalities were still busy with procurement processes with some projects starting late in the financial year due to late appointment of panel of development consultants. In turn, this led to the low expenditure of performance of 47.4 per cent against the allocation. A concerted effort is required from the NTO to support municipalities that receive this grant to improve performance against this programme.

Infrastructure Conditional Grants Expenditure as at 30 June 2022

35. Direct conditional grants allocated for the 2021/22 financial year against the infrastructure grants were adjusted to an amount of R35.1 billion following the reduction of R472.2 million during the adjustment budget process from the original allocation of R35.6 billion. This again, excludes the

USDG performance.

36. Of the R35.1 billion allocated, R35 billion or 99.7 per cent has been transferred to municipalities and 80.8 per cent or R28.3 billion was reported as expenditure as at 30 June 2022 against the revised total infrastructure allocation by NTOs.
37. Municipalities reported an expenditure of 55.8 per cent against the revised allocation. Again, this is a significant variance between what municipalities have reported and what NTOs are saying during the same period.
38. Infrastructure grants reflect an expenditure of 84.3 per cent for the same quarter in the previous financial year. Just like capacity grants, infrastructure grant performance has declined. The Municipal Infrastructure Grant, Integrated Urban Development Grant, Regional Bulk Infrastructure Grant, and the Rural Road Assets Management Systems Grant performances remained fairly the same for the same quarter for the current 2021/22 and 2020/21 financial years. A significant decline is notable for the Public Transport Network Grant, Neighbourhood Development Partnership Grant (Capital Grant) and the Municipal Emergency Housing Grant.

2020/21 Expenditure on rollover of conditional grants

39. Municipalities across the various categories continue to neglect the reporting of roll-over approvals against the unspent conditional grant rollovers. In 2021/22 financial year, a total of R1.2 billion was approved for roll-over against the total request amount of R3.3 billion. Rollover requests of most municipalities were rejected against the 148 submissions because of failure to comply with the MFMA Budget Circular No. 108 issued by National Treasury. Furthermore, National Treasury observed that most municipalities are still struggling to spend both the approved roll-over amount and the current year allocation as municipalities report significantly low expenditure at the end of the fourth quarter.
40. The overall performance is not satisfactory, while municipalities indicated that most of the roll-over projects have already been implemented, contractors are on site and expenditure will occur once the rollover applications has been approved and this has not been the case. Municipalities reported expenditure of R152.5 million or 13 per cent against the total roll- over approved amount.

A summary of key aggregated information is included in the tables in Annexure A.

Further details on this report can be accessed on the National Treasury’s website: www.treasury.gov.za.