Speech delivered by KwaZulu-Natal MEC for Finance, I Cronjé, on the occasion of the municipal budget performance 2009/10 third quarter review, KwaZulu-Natal legislature

Introduction

Honourable Speaker, I table this report as required by section 71 (7) of the Municipal Finance Management Act, No 56 of 2003. The third quarter municipal budget review covers the financial performance of 58 municipalities delegated to the Provincial Treasury for assistance and monitoring of their financial affairs.

The review also includes the financial performance of three non-delegated municipalities, namely eThekwini, Msunduzi and uMhlathuze. The non-delegated municipalities are monitored by the National Treasury.

The third quarter budget review covers the revenue and expenditure for the first three quarters of the 2009/10 municipal financial year. The information is published by the Provincial Treasury in terms of section 71 of the Municipal Finance Management Act, 2003.

I need to point out that the information provided by the municipalities in this report has not been audited. The information is therefore not intended to be a substitute for detailed research or the exercise of professional judgement. It has been made available for general guidance only.

The consolidated statement provides the in-year financial performance of municipalities against their budgeted revenue and expenditure, covering capital and operating budgets, debtors and cash flow position.

A. Financial reporting

Assessing the expenditure performance of municipalities assists in serving as a control and management tool and also serves as an early warning signal for the identification of financial problems. We alluded to the poor financial reporting of some municipalities on critical aspects of their budgets in the first quarter 2009/10 review. I am pleased to say that the non-submission situation has improved and only a few municipalities did not provide the required information.

However, there is still some data outstanding and the credibility and accuracy of some information provided remain questionable. The mechanical straight line method of projection was used as the benchmark for expenditure and revenue at the end of quarter three. In terms of the straight line method of projection, all municipalities should have spent and collected at least 75percent of their budgets as at the end of quarter three. Where municipal budgets were not published, the Appendix A budget publication were used.

B. Municipal expenditure performance: 2009/2010

B.1. Operational backdrop

The aggregated cumulative revenue collection at the end of the third quarter of the 2009/10 municipal financial year was slightly below the expected benchmark of 75 percent. Municipalities collected R23.6 billion (71.9 percent) of a total adjusted revenue budget of R32.8 billion. The impact of the recession could be the determining factor for not reaching the targeted 75 percent.

B.2. Operating revenue and expenditure

Operating revenue collected per source as a percentage of total operating revenue collected as at 31 March 2010:

Property rates: 20.4 percent
Service charges: 39.5 percent
Other own revenue: 40.1 percent

• We had a reasonable expectation of a noticeable increase in revenue from property rates as municipalities have already implemented the Municipal Property Rates Act (MPRA). However, for the third quarter, revenue from property rates only increased by one percent when compared to the revenue collections from this source for the third quarter of the previous financial year. This could be indicative of the effects of the economic recession on municipalities.
• Other revenue contributed the most towards the total operating revenue (40.1 percent). The largest portion of other revenues was from transfers by national and provincial government.
• Service charges in quarter three of 2009/10 have increased by 23.8 percent when compared to quarter three of 2008/09. The increase may be attributed to the high increases in electricity tariffs.

Operating revenue per district and local municipalities

• Five municipalities (Vulamehlo, uMzumbe, Indaka, Nquthu, and uMhlabuyalingana) did not report on property rates in quarter three, an improvement on the 11 municipalities who failed to report on this item in quarter one.
• Of concern is the slow collection of revenue in Sisonke district (63.6 percent). Annexure A shows that KwaSani (77.4 percent) collected more than the 75 percent benchmark, while all the other municipalities in this district under collected.
• uMgungundlovu and uThungulu collected 71.3 percent and 74.3 percent, respectively. These two districts include the non-delegated Msunduzi and uMhlatuze municipalities. The non-delegated eThekwini Metro (68.2 percent) collected the most revenue in rand value.
• In some instances the data provided should be treated with circumspect, e.g. the reported 99.1 percent collection of revenue for the Zululand district and 90.7 percent for the uThukela district appear unrealistically high.

B.2.2. Provincial total operating expenditure

• Although all municipalities reported on its operating expenditure, no expenditure was reported on repairs and maintenance. It is assumed that municipalities included this expenditure under other expenses (45.8 percent), followed by employee related costs (28.5 percent) and bulk purchases (24.7 percent).
• The provincial aggregated employee related costs (28.5 percent) was within the generally accepted norm of 30 percent of the total operating expenditure.

Operating expenditure per item as a percentage of total operating expenditure as at 31 March 2010:

Employee related costs: 28.5 percent
Provision for working capital: 1.1 percent
Repairs and maintenance: 0.0 percent
Bulk purchases: 24.7 percent
Other expenditure: 45.8 percent

Municipalities spent R20.2 billion (68.3 percent) of their total adopted adjusted budget of R29.7 billion. Most expenditure was on other expenses (45.8 percent), followed by employee related costs (28.5 percent) and bulk purchases (24.7 percent).

Operating expenditure per district and local municipality

• At district level, Ugu (42 percent), uThukela (33.6 percent), uMzinyathi (37.2 percent), Zululand (42.2 percent), uMkhanyakude (42.8 percent) and Sisonke (36.2 percent) spent more on employee related costs than the 30 percent benchmark.
• The districts that recorded the least expenditure in the third quarter are uMzinyathi (40.8 percent), Ugu (57.2 percent) and uMkhanyakude (57.2 percent). The under-expenditure of municipalities such as Msinga (39.3 percent) and the uMzinyathi district municipality (20.3 percent) is a matter of concern. The latter attributed their under expenditure to a delay in payments of bulk water purchases and unfilled budgeted posts.

Table 1: Capital revenue and expenditure

Table 1: Capital revenue and expenditure

• Capital sources of finance for quarter three decreased by 12 percent, compared to quarter three of the previous municipal financial year. Capital expenditure for quarter three has similarly decreased by 10.2 percent in comparison to quarter three of 2008/09.

C.1. Provincial total operating expenditure

External loans: 2.9 percent
Internal contributions: 43.5 percent
Grants and subsidies: 51.0 percent
Other: 2.7 percent

Capital expenditure was mainly funded through grants and subsidies (51 percent) and internal contributions (43.5 percent). This supports the notion that municipalities are still very much grant reliant with regard to capital projects.

C.2. Provincial total capital expenditure

• By the end of March 2010, the reported capital spending by municipalities was R6.8 billion (64.1 percent) of the R10.6 billion total adjusted capital budget for the 2009/10 financial year. This is below the straight line projection benchmark of 75percent.
• Twelve municipalities spent less than 30 percent of their capital budget. They are Hibiscus Coast (29.4 percent), Richmond (27.6 percent), Nkandla (25.5 percent), Ndwedwe (25 percent), uMshwathi (19.9 percent), uMuziwabantu (17.7 percent), Vulamehlo (13.9 percent), eDumbe (10.6 percent), Amajuba (22.6 percent), Mfolozi (1.3 percent), eZinqolweni (22.5 percent) and Endumeni (seven percent). Amajuba district spent the most on operating expenditure and the least on capital projects at the end of the third quarter of 2009/10. Some reasons given for their under-expenditure are a lack of planning, project management, discipline and streamlining of supply chain management processes.

Municipalities will have to address poor expenditure planning. An Arabic proverb says: "Time is like a sword. If you did not cut it, it will cut you". Infrastructure delivery needs to be planned well before the beginning of the municipal financial year. Late planning, coupled with a delay in finalising supply chain management processes will without a doubt result in unwise spending and under spending where it is most needed. Not only does under spending deprive our people from service delivery but it also exacerbates the current backlogs.

Although Ubuhlehbezwe (136.4 percent), Big Five False Bay (112.8 percent), Msinga (104.3 percent) and Indaka (100.5 percent) reported overspending on capital projects, it seems highly unlikely. Since only Indaka uploaded their adjustment budget figures, an accurate analysis could not be performed for the other three municipalities and the omission of this data distorts the percentage spent by the various districts and ultimately the province. It supports the view that some data provided by some municipalities may not be credible. One does not always know whether you look at a balance sheet or a balance cheat!

Capital expenditure per item as percentage of total expenditure as at 31 March 2010:

Water and sanitation: 32.3 percent
Electricity: 5.9 percent
Housing: 14.9 percent
Roads, pavements, etc: 13.2 percent
Other: 33.7 percent

The bulk of the capital expenditure at 31 March 2010 was spent on other capital projects (33.7 percent) and water and sanitation (32.3 percent). Slow expenditure was reported on electricity (5.9 percent) and roads, pavements, bridges and storm water (13.2 percent) and housing (14.9 percent).

• uMzinyathi, uMkhanyakude and uThungulu districts incurred the lowest expenditure on the housing.
• Of all the districts, Amajuba district spent the least on Water (R4.7 million).

D. Cash receipts and payments

Table 2: Cash receipts and Payments

By the end of March 2010 cash inflows amounted to R26.8 billion, while cash payments of R27.2 billion were made. This means that the outflow exceeded the inflows by R400 000 in total.

• The bulk of cash receipts came from service charge (R15.3 billion). Grants and subsidies (R8.6 billion) was the second largest contributor, and statutory receipts (R485 million) and net increase or decrease (-R551 million) in asset and liability contributed the least to totalreceipts.
• Cash and creditor payments accounted for the bulk of cash outflows (R49.8 percent), followed by employee related costs (20.8 percent) and capital payments (20.7 percent). Capital payments decreased by R700 000 from quarter two, congruent with the under expenditure on capital projects

E. Outstanding municipal debt

The total municipal debt grew by R300 million from 31 December 2009 to R8.2 billion at 31 March 2010. eThekwini (R4.9 billion), uMgungundlovu (R923.9 million), Amajuba (R511.5 million) and uThukela (R452.4 million) accounted for the largest debt in the province. This could be attributable to the current strained economic environment or ineffective credit control.

Debtors age analysis as at 31 March 2010:

0 to 30 days: 13.9 percent
30 to 60 days: 5.6 percent
60 to 90 days: 2.9 percent
Over 90 days: 77.6 percent

Debtors by customer group as at 31 March 2010:

Government: 13.7 percent
Business: 13.1 percent
Household: 38.7 percent
Other: 34.5 percent

Debtors by income source as at 31 March 2010:

Water: 26.5 percent
Electricity: 11.7 percent
Property rates: 38.2 percent
Sanitation: 2.0 percent
Refuse removal: 2.2 percent
other: 19.5 percent

The debt has been consistently the highest in the property rates category since the first quarter of 2010/11. This points to possible administrative inefficiencies, such as ineffective debt collection and credit control policies and procedures; residents not being billed timeously; inaccurate and non allocations of receipts; or consumers not paying.

• The Municipal Property Rates Act (MPRA) provides municipalities with a steady stream of revenue to enable them to execute their constitutional service delivery functions. The inability of municipalities to collect property rates ultimately threatens financial sustainability.
• We are concerned that 77.6 percent of the debt lies in the over 90 days' category. With the exception of uThungulu district, all other districts, including the eThekwini Metro, have more than 60 percent of their total debt in the over 90 days' category, a clear indication that municipal debt is spiraling out of control. It could eventually become irrecoverable, to the detriment of service delivery and the liquidity of the municipalities.
• Furthermore, this is not the true debt position as 9 municipalities did not report on their debtors. They are Vulamehlo, uMshwati, Umzumbe, Ezinqoleni, Impendle, Imbambazane, Maphumulo, uMhlabuylingana and Amajuba district municipality. uMkhanyakude district contributed R98.5 million towards the debt in the province. This could be attributed to a high indigent level and the small revenue base within this district.
• The bulk of the debt is owed in respect of property rates (38.2 percent). The customer group that owes the most consists of households (38.7 percent). There was no significant increase in government debt between quarters two and three. The municipality should make concerted efforts to collect government debt as there are mechanisms in place to support municipalities to collect such debt.

It is clear that our municipalities will have to make concerted efforts to collect revenue for services rendered constantly and continuously. Cash coverage is especially important when a municipality is faced with consumer boycotts and protestations that threaten revenue collections. In this regards, the National Treasury wants all municipalities to have cash coverage to cover its fixed operating expenditure for at least three months.

E. Assistance and commitment from KwaZulu-Natal Treasury

E.1. Municipal Support programme

Our observations at the municipalities have revealed the following:

• significant lack of financial controls
• poor recordkeeping (partly due to inadequate systems and training)
• lack of adequate policies, procedures and appropriate delegations of authority
• Lack of good governance in Supply Chain Management practices
• lnappropriate use of conditional grants
• inadequate billing systems
• no process of in year reporting
• inadequately skilled financial staff

It is clear that our municipalities need all the assistance they can get. To assist and support municipalities in need of sound financial management; and to contribute to their survival and continued delivery of services, Dr Mkhize, our Premier and former MEC for Finance, launched the Municipal Support programme in November 2007. The KwaZulu-Natal Provincial Treasury has since supported 26 municipalities.

E.1.1. Audit outcomes

Treasury assesses the status of their cash flows, debtors, actual capital expenditure and the overall viability of the municipality. In addition, the audit opinions of the previous three years are considered to determine any improvements that may have been made by the municipality.

Appropriate scores are attributed to these criteria to assist in prioritising those in most need of assistance. Phase three of the Municipal Support programme is set to commence in August 2010. The following eight municipalities have been identified as requiring support during phase three of the Municipal Support programme:

• Nongoma municipality
• eDumbe municipality
• Ulundi municipality
• Amajuba municipality
• City of uMhlatuze
• eMadlangeni municipality
• Abaqulusi municipality
• Endumeni municipality

The support has had a significant effect on the 2008/09 audit opinions of those municipalities supported by the programme. The improvements overall in audit opinions is encouraging especially in light of the drive towards municipalities receiving clean audit reports by 2014.

Of the nine municipalities that received disclaimer audit opinions in the last financial year, Provincial Treasury is assisting Nkandla municipality, Nqutu municipality and uMkhanyakude district municipality. Support at Nongoma will commence in August 2010.

E.1.2. Generally recognised accounting practice (GRAP) conversion

The Municipal Support programme has also assisted municipalities in converting their financial records from the Institute of Municipal Finance Officers (IMFO) basis of accounting to the GRAP standards of accounting. Of the 19 low capacity municipalities in the province that are required to convert their financial statements from IMFO to GRAP in the 2009/10 financial year, Provincial Treasury is undertaking the conversion for 11 of them.

E.1.3. Risk management

Of the nine municipalities that have received disclaimer audit opinions for the 2008/09 financial year, Provincial Treasury has undertaken risk assessments for six of the municipalities. Nongoma municipality had failed to respond to our request for this free service and eDumbe and Mfolozi municipality will form part of our scope in the 20010/11 financial year. In total, of the 61 municipalities in the province, Provincial Treasury has to date completed the risk assessments for 34 municipalities.

E.1.4. Supply chain management

• As part of continuous support to municipalities, Provincial Treasury held municipal supply chain management forums on 29 January, 26 February and 26 March 2010. Areas covered included Broad-Based Black Economic Empowerment (BBBEE) and Codes of Good Practice and their impact on supply chain management; small, medium and micro-enterprises (SMME) fund accessibility, notice issued by the South African Revenue Service (SARS) pertaining to tax Clearance certificates, terms of reference for banking services, rates clearances, briefing sessions for bids and terms of reference for a procurement tool.
• Intervention and support was provided at 18 municipalities. Support was provided in direction to sale of immovable property, value added tax (VAT), the supply chain management model policy, disposal of assets and certain bidding processes anomalies.

E.1.5. Banking and cash management

In terms of Section 11(4) of the MFMA, 26 municipalities had not submitted the first quarterly consolidated report of all withdrawals. The banking section of Provincial Treasury conducted 14 municipal site visits, trained municipal staff on compliance reporting and provided them with Municipal Investment Regulations and a generic investment policy.

Conclusion

The lack of competent staff is of concern. There is no "quick fix" solution to this as capacity building takes time and the Provincial Treasury's resources are limited. Other short term measures may need to be taken to ensure not only the sustained recovery at these municipalities, but also the recruitment and training of suitable personnel to hold key positions in the municipalities in the future.

The Municipal Support programme has raised awareness at the municipalities of the need to substantially improve their accounting records. The efforts of the teams assisting in this regard are appreciated by the leadership.

However, there is a need for greater participation and commitment by the accounting staff, in particular, to the improvements being made. Our vision for this programme is to ensure the sustainability of municipalities in the province.

We are determined to take the improvement in the financial reporting much further. With the ongoing support by National and Provincial Treasuries and the dedication of my colleague in Cooperative Government and Traditional Affairs, MEC Dube, as well as committed municipal and community leaders we can turn the corner, and deliver the services our people deserve.

I thank you.

Source: Provincial Treasury, KwaZulu-Natal Provincial Government