M Modiselle: South African Local Government Association Budget
Week

23 August 2006

�Fostering improved change in financial management�

Programme Director,

It is a great pleasure for us to be part of this platform to reflect on our
views regarding what we consider to be the key towards improving financial
management in our municipalities. It is our hope that this summit will
contribute towards inculcating a new prism through which we should consider
that which constitutes improvement in financial management.

We must further salute organised local government, under the aegis of the
South African Local Government Association, for electing to concern itself with
this important question pertaining to financial management. Without any serious
diagnostic analysis of the financial affairs of each municipality, our
contribution to this summit will do two things:

One, we will paint a cursory picture of the state of municipalities in the
province with a view to provide a human development perspective to the need to
foster improved change in financial management,

And two, we will highlight some of the essential factors we think are
necessary to help achieve the goals of our developmental state.

Programme Director,

It is important to note that 17 of the 25 municipalities in the province are
on Project Consolidate. As all the delegates should know by now Project
Consolidate is a hands-on support initiative to assist struggling
municipalities.

These municipalities are faced with a plethora of challenges ranging from
poor revenue collection and financial management, sanitation backlogs, to lack
of project management and technical skills. Primarily, the following
municipalities will generally fall within this category:

* Tswaing Local Municipality
* Ventersdorp Local Municipality
* Mamusa Local Municipality
* Maquasi Hills Local Municipality
* Kgetlengrivier Local Municipality
* Naledi Local Municipality.

The common feature among Central, Bophirima and Southern District
municipalities is that they all have sanitation backlogs in that there is
evidence in these areas of the use of the bucket system. This is especially the
case in the Matlosana area.

As regards to challenges of a transformational nature, one can safely say
that most municipalities lack knowledge of the utility of Performance
Management Systems (PMS). In many municipalities, section 57 managers were
entered into contracts that could keep them in municipalities for the duration
of their natural lives, due to lack of contract development and management
skills.

The absence of internal control systems such as internal audits and supply
chain management imply that there are no internal checks and balances within
our municipalities. What exacerbates the situation even further is the absence
of comprehensive asset registers and a lack of proper property valuations in
the majority of our municipalities.

Programme Director,

It is important that we consistently refer to this important matter of
financial management capacity. One of the most noticeable financial
underperformance in the preceding financial year relates to capital
expenditure. We must highlight here that by the close of the fourth and final
quarter of the 2005/06 municipal financial year, none of our municipalities had
spent more than 80 percent of their capital expenditure (Capex).

This is despite the fact that in our country and province �there remain
significant needs to scale up infrastructure investment especially in the yet
un-served areas and improve efficiency in all major infrastructure sectors if
South Africa�s infrastructure performance is to catch up with its group of
upper middle-income countries.

In a recent World Bank Policy Research Working Paper based on a comparative
study of South Africa�s infrastructure performance, Bogetic and Fedderke
(February 2006) make the following conclusion:

�Despite recent gains, access remains a major issue in electricity and
especially in water and sanitation (particularly in rural areas) and so does
performance in local telecom services. Even transport performance appears
comparatively less strong than would be expected in an upper middle-income,
though more in-depth analysis of comparative performance of transport may be
warranted to develop a more nuanced picture.�

As governors and administrators in the local government sector, we should be
aware that directly and indirectly infrastructure affects the welfare of our
communities via access to and quality of basic services such as water and
sanitation and is also associated with child health, human capital accumulation
and the achievement of the Millennium Development Goals (MDGs).

But equally important as development economics has taught us, infrastructure
strongly affects economic growth (Luiz 2005). For a better understanding of
this causal relationship between infrastructure and the human capital
development imperative we need to give a service and human development
perspective to the effects of poor financial management:

* under-performance in capital expenditure denies our communities access to
basic services such as water, sanitation and electricity

* lack of these basic services oftentimes lead to chronic ailments caused by
waterborne bacteria such as cholera bilharzias and other gastro-intestinal
diseases

* prevalence of such conditions at the homes often impact negatively on
young peoples� abilities to concentrate and absorb teaching and thus tend to
lose interest in education, leading to a domino effect as follows:

1. Lack of education inadvertently creates serious skills shortage which has
come to characterise the South African job market.
2. As we all know, lack of appropriate skills contributes to the declining
probability for investment and with it the creation of new job
opportunities.
3. Also we must remember that inadequate-expenditure (or lack thereof) on
capital budgets implies a lack of investment in infrastructure required to
create conditions that are conducive for economic investment.

Programme Director,

As we can all see this is a cyclical dead-end. Whilst improved financial
management is not the only determinant to leapfrog the performance of our
municipalities, it is obviously among the critical factors. It is at this stage
that we should decode what improved and sustainable financial management must
entail in the context of our environment:

First, the financial management regime we have established requires that
municipalities must prepare financial statements and subject them to an
independent audit. Our high capacity municipalities are expected to prepare
these financial statements according to Generally Recognised Accounting
Practice (GRAP) standards starting from the 2005/06 financial year.

The medium and low capacity municipalities will follow respectively over the
next two financial years. Together, both the political and administrative
leadership of our municipalities must ensure that this requirement is met.

Second, in year reporting to the office of the Auditor-General, provincial
Treasury and the Department of Developmental Local Government and Housing
provides early warning systems that assist both the municipality and other
relevant organs of state to prepare remedial plans. It is thus incumbent on the
accounting officers of our municipalities to ensure that these are accordingly
produced and submitted to the relevant authorities.

Third, the establishment of all the necessary internal control measures are
essential to ensure the prudent use of council resources and assets and their
proper valuation. Of particular importance in this respect, is the
establishment of internal audit sections, audit committees, supply chain
management systems and the use of appropriate financial management systems.

Further to these, cognisance should be taken that the Municipal Finance
Management Act (MFMA) expressly details activities from which both the local
politicians and administrative functionaries of a municipality or municipal
entity are forbidden from partaking in.

Fourth, whilst many factors may be considered important to ensure
improvement in financial management nothing will substitute the need for the
employment of competent chief financial officers and the establishment of the
budget and Treasury office under their supervision.

This consideration is intended to support the accounting officers by
ensuring efficiency and focused sharing of responsibilities within the
administration. We must emphasise here that even well-intended and
conceptualised government initiatives such as Project Consolidate will not
succeed in the absence of basic competencies that will allow for the transfer
of expertise.

Fifth, for the proper implementation of the financial reforms the accounting
officers must also consider developing and implementing delegation systems that
will assist in maximising administrative and operational efficiency whilst
providing adequate checks and balances in the municipal financial
administration.

It must, however, be noted that delegation of authority does not divest the
accounting officer of the authority and accounting responsibility for any
delegated function.

The sixth and final consideration, Programme Director, relates to council
oversight. Continuously, the results of financial audits of municipalities
attract increasing attention from different political committees provincially
and nationally.

And as we have seen in the past, this attention is never directed to the
administration but to the political leadership of our municipalities. Hence,
the oversight role of council over the administration is not entirely about
micro managing delivery but more about ensuring that the administration does
implement council policies and decisions within the expected timeframes.

Put differently, discharging oversight simply means governing. Thus any
council which does not require and/or receive these monthly, quarterly and
annual reports from the administration cannot claim to be in charge.

Programme Director,

We have raised these issues not because we derive pleasure in the depressed
looks on the faces of the participants. All we ask is for each and every
municipality to take a closer look at itself against all these requirements and
answer for itself the most critical question: �Where are we in relation to all
this?�

If our response to this question is not materially expressed through our
peoples� access to basic services such as water and sanitation, that is, if it
does not appreciate that for their survival our people need clean drinking
water, we must accept that ours is not the course of a developmental state.

I thank you!

Issued by: Department of Finance, North West Provincial Government
23 August 2006