Local Government Revenue and Expenditure: Second Quarter Local Government Section 71 report for the period: 1 July 2017 – 31 December 2017
National Treasury has today released local government’s revenue and expenditure for the second quarter of the 2017/18 financial year, as well as spending on conditional grants for the same period. This report covers the second quarter of the municipal financial year ending on 31 December 2017.
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 problems in implementing municipal budgets and conditional grants.
In-year reporting is institutionalised with most municipalities that consistently produce quarterly financial reports. The reporting facilitates transparency, better in-year management as well as the oversight of municipal budgets. This makes these reports management tools and early warning mechanisms for councils, provincial legislatures and officials in order to monitor and improve municipal performance.
Key trends:
Aggregate trends
1. On aggregate, municipalities spent 40.4 per cent, or R168.3 billion, of the total adopted budget of R416.9 billion as at 31 December 2017 (Second quarter results for the 2017/18 financial year). In respect of revenue, aggregate billing and other revenue amounted to 46.5 per cent, or R192.0 billion, of the total adopted revenue budget of R413.2 billion.
2. Of the adopted operating expenditure budget amounting to R346.3 billion, R146.6 billion or 42.6 per cent was spent by 31 December 2017.
3. Municipalities have adopted a budget for salaries and wages expenditure at R111.1 billion, which is R18.6 billion more than the adjusted budget of R92.5 billion for the 2016/17 municipal financial year. This constitutes 32.1 per cent of their total operational expenditure budget of R346.3 billion. At 31 December 2017, spending is 43.1 per cent, or R47.9 billion.
In the period under review, capital expenditure amounted to R20.6 billion, or 29.2 per cent, of the adopted capital budget of R70.6 billion. The slow spending on the capital budget is a concern. This partly relates to the hockey stick phenomena in Local Government but also the late start of effective SCM planning processes.
4. Aggregated year-to-date total expenditure for metros amounts to R105.1 billion, or 43.5 per cent, of their adopted budget expenditure of R241.3 billion. The aggregated adopted capital budget for metros in the 2017/18 financial year is R37.9 billion, of which 26.2 per cent, or R9.9 billion, has been spent as at 31 December 2017.
5. When billed revenue is measured against their adopted budgets, the performance of metros shows surpluses across all four core services for the second quarter of 2017/18. This does not take into account the collection rate:
- Water revenue billed was R15.1 billion against expenditure of R13.7 billion;
- Electricity revenue billed was R37 billion against expenditure of R32.8 billion;
- The revenue billed for waste water management was R3.9 billion against expenditure of R2.9 billion, and
- Levies for waste management billed were R4.3 billion against expenditure R4.1 billion.
6. As at 31 December 2017, aggregated revenue for secondary cities is 41.8 per cent or R24.4 billion of their total adopted budget revenue of R58.4 billion for the 2017/18 financial year. The year-to-date operating expenditure level of the secondary cities is 35.6 per cent or R18.3 billion of the total adopted operating budget of R51.4 billion for the 2017/18 financial year.
7. Capital spending levels are low at an average of 31.2 per cent or R2.4 billion of the adopted capital budget of R7.8 billion.
8. The performance against the adopted budget for the four core services for the secondary cities for the second quarter 2017/18 also shows surpluses against billed revenue without taking into account the collection rate:
- Water revenue billed was R3.3 billion against expenditure of R2.2 billion;
- Electricity revenue billed was R7.9 billion against expenditure of R6.7 billion;
- The revenue billed for waste water management was R1.3 billion against expenditure of R748 million; and
- Levies for waste management billed were R1 billion against expenditure of R609 million.
9. Aggregate municipal consumer debts amounted to R138.2 billion (compared to R117.7 billion reported in the second quarter of 2016/17) as at 31 December 2017. A total amount of R858.1 million, or 0.6 per cent, has been written off as bad debt. Government accounts for 5.4 per cent, or R7.4 billion (R6.3 billion reported in the second quarter of 2016/17). The largest component relates to households which account for 71.8 per cent, or R99.2 billion (66.2 per cent or R77.9 billion in the second quarter of the previous financial year).
10. It needs to be acknowledged that not all the outstanding debt of R138.2 billion is realistically collectable, as these amounts are inclusive of debt older than 90 days (historic debt that has accumulated over an extended period), interest on arrears and other recoveries.
11. If consumer debt is limited to below 90 days, then the actual realistically collectable amount is estimated at R26 billion. This should not be interpreted that the National Treasury by implication suggests that the balance must be written-off by municipalities.
12. Metropolitan municipalities are owed R72.5 billion (R57.0 billion reported in the second quarter) in outstanding debt as at 31 December 2017. This represents a decrease of R300 million when compared to the previous quarter’s publication. The largest contributors are the City of Johannesburg, which is owed the largest amount at R18.3 billion, followed by Ekurhuleni Metro at R14.4 billion, City of Tshwane at R10.8 billion, and eThekwini at R9.5 billion.
13. Households in metropolitan areas are reported to account for R56.1 billion, or 77.4 per cent, of outstanding debt to metros, followed by businesses, which account for R13 billion or 17.8 per cent. Debt owed by government agencies is approximately R1.7 billion, or 2.4 per cent, of the total outstanding debt owed to metros.
14. Secondary cities are owed R24.6 billion (R25.9 billion reported in the second quarter of 2016/17) in outstanding consumer debt. The majority of debt is owed by households, which amount to R15.4 billion, or 62.6 per cent, of the total outstanding debt. Out of the total debt of R24.6 billion, R20.9 billion, or 84.6 per cent, has been outstanding for more than 90 days.
15. Municipalities owed their creditors R41.2 billion as at 31 December 2017, a decrease of R1.7 billion when compared to the R42.9 billion reported in the first quarter of 2017/18.
16. The Free State has the highest percentage of outstanding creditors greater than 90 days at 87.6 per cent, followed by Mpumalanga at 80.7 per cent, and the North West at 76.2 per cent. The year-on-year increase in outstanding creditors could be an indication that municipalities are experiencing liquidity and cash challenges.
17. The aggregated year-to-date actual collection rate is 88.1 per cent, compared to an adopted budgeted collection rate of 90.3 per cent. This represents an aggregated under-performance of 2.2 per cent. It is suspected that the reported collection rate is distorted, owing to reporting inconsistencies on cash flow movements of municipalities.
18. Metros budgeted for a collection rate of 92.3 per cent, and achieved an actual collection of 94.8 per cent, which is 2.5 per cent above the target. The secondary cities reported 72.8 per cent collection against an adopted collection rate of 88.1 per cent, which is 15.3 per cent below the budgeted collection rate.
19. The total balance on borrowing for all municipalities equates to R68.3 billion as at 31 December 2017. This includes long term loans of R44.2 billion, long term marketable bonds of R15.1 billion, short term non-marketable bonds of R5.4 billion, other short term loans of R3.3 billion. The balance represents other short and long term financing instruments.
20. As at 31 December 2017, the total investments made by municipalities equates to R30.7 billion. This is R823 million less than the R31.5 billion reported in the second quarter of 2016/17. Investments include bank deposits of R23.1 billion, guaranteed endowment policies (sinking funds) of R4.7 billion, negotiable certificates of deposits at banks of R1.5 billion, listed corporate bonds of R1.3 billion, and some smaller investments.
Conditional Grants
21. According to the Division of Revenue Act, 2017 (Act No.3 of 2017) (DoRA), R108 billion has been allocated to local government in the 2017/18 financial year. This amount comprises of the unconditional transfer of the Equitable Share Equitable Share of R57 billion, direct conditional grants allocated for capacity grants of R1.9 billion, includes an unallocated amount of R300 million for municipal disaster, direct conditional grants for infrastructure projects of R30 billion, the Urban Settlement Development Grant of R11.4 billion and the Integrated City Development Grant of R292 million and Indirect conditional grants of R7.3 billion.
22. As at 31 December 2017, an amount of R20.2 billion was transferred to municipalities, which is 63 per cent against an allocation of R32.1 billion for direct conditional grants.
23. The overall expenditure reported by municipalities, as at 31 December 2017, is 68.4 per cent, or R12.2 billion against the R20.2 billion transferred to municipalities. In terms of the total allocation, the aggregate expenditure is 38.2 per cent, or R12.2 billion, of R39.4 billion allocated to municipalities as direct conditional grants. Whereas expenditure reported by national transferring officers (NTOs) is sitting at 53 per cent of the R20.2 billion transferred.
24. The highest performing direct infrastructure grants to municipalities during the second quarter is the Municipal Infrastructure Grant (MIG) with reported performance of 43.2 per cent, the
Integrated National Electrification Programme (INEP) grant with reported performance of 35.2 per cent and the Public Transport Network (PTNG) with reported performance of 31.7 per cent.
A summary of key aggregated information is included in the tables in Annexure A.
Note to edition:
- This information is published in terms of Sections 71 of the Municipal Finance Management Act, 2003 (Act No. 56 of 2003) (MFMA), and 30(3) of the 2017 Division of Revenue Act. The budgeted figures shown are based on the 2017/18 adopted budgets approved by municipal councils.
- In terms of the process, Municipal Managers and Chief Financial Officers are required to sign and submit data to the National Treasury by 29 January 2018. Any queries on the figures in these statements should be referred to the relevant Municipal Manager or Chief Financial Officer. Queries on conditional grants may be referred to the national department responsible for administering the grant.
- A municipal budget must be funded in terms of Section 18 of the MFMA before a Municipal Council can adopt that budget for implementation. A funded budget is essentially a budget that is funded by a combination of cash derived either from realistically anticipated revenues to be collected in that year, and cash backed surpluses of previous years. It is a common practice amongst most municipalities, when preparing their annual budgets, to overstate or inflate revenue projections, either to reflect a surplus, or on the surface to show that excess expenditure requirements are adequately covered by revenues to be collected. Therefore, the revenue estimates are seldom underpinned by realistic or realisable revenue assumptions resulting in municipalities not being able to collect this revenue, and as a result finding themselves in cash flow difficulties. Should such situations arise, municipalities must adjust expenditure downwards to ensure that there is sufficient cash to meet these commitments.
- This second quarter publication covers 257 municipalities on financial information and conditional grant information.
