Treasury releases Second Quarter Local Government Section 71 Report

Local Government Revenue and Expenditure: Second Quarter Local Government Section 71 Report

For the period: 1 July 2019 – 31 December 2019

National Treasury has released the local government revenue and expenditure report for the second quarter of the 2019/20 financial year.  This report covers the performance against the adopted budgets of local government for the second quarter of the municipal financial year ending on 31 December 2019 and includes spending against conditional grant allocations for the same period.

Noteworthy, is that this is the first municipal financial year that the report is prepared by using the figures from the mSCOA data strings.  The Municipal Standard Chart of Account (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 problems in implementing municipal budgets and conditional grants.

The credibility of the information contained in the mSCOA data strings is a concern.  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 or from their core financial systems.  Instead they prepare their budgets and reports on 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 adopted 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 2019/20, the Local Government Portal will be locked at the end of each quarter.  System vendors were also requested to build this functionality into their municipal financial systems.

The Section 71 report facilitates transparency, better in-year management as well as the oversight of 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. The improvement of the credibility of the data strings is therefore a priority for National and provincial treasuries.

Key trends:

Aggregate trends

1. In aggregate, municipalities spent 43.7 per cent, or R210.5 billion, of the total adopted expenditure budget of R481.7 billion as at 31 December 2019 (second quarter results for the 2019/20 financial year).  In respect of revenue, aggregate billing and other revenue amounted to 50.1 per cent, or R239.7 billion, of the total adopted revenue budget of R478.4 billion.
2. Of the adopted operating expenditure budget amounting to R403.3 billion, R167.6 billion or 41.6 per cent was spent by 31 December 2019.
3. Municipalities have adopted the budget for salaries and wages expenditure at R125 billion, which is R11.3 billion more than the adopted budget of R113.6 billion for the 2018/19 municipal financial year. This constitutes 31 per cent of their total operational expenditure budget of R403.3 billion.   At 31 December 2019, spending is 41.1 per cent, or R51.4 billion.
4. In the period under review, capital expenditure amounted to R42.9 billion, or 54.7 per cent, of the adopted capital budget of R78.4 billion.
5. Aggregated year-to-date operating expenditure for metros amounts to R117.4 billion, or 42.2 per cent, of their adopted budget expenditure of R277.9 billion. The aggregated adopted capital budget for metros in the 2019/20 financial year is R40.5 billion, of which 22.3 per cent, or R9 billion, has been spent as at 31 December 2019.
6. When billed revenue is measured against their adopted budgets, the performance of metros reflects a shortfall across water services for the second quarter of the 2019/20 financial year. This does not take into account the collection rate:

• Water revenue billed was R11.9 billion against expenditure of R14.2 billion;
• Energy sources revenue billed was R39 billion against expenditure of R36.3 billion;
• The revenue billed for waste water management was R3.3 billion against expenditure of R3.1 billion, and
• Levies for waste management billed were R5 billion against expenditure R3.8 billion.

   7. As at 31 December 2019, aggregated revenue for secondary cities is 44 per cent or R27.9 billion of their total adopted revenue budget of R63.4 billion for the 2019/20 financial year.  The year-to-date operating expenditure level of the secondary cities is 35.1 per cent or R20.7 billion of the total adopted operating budget of R58.9 billion for the 2019/20 financial year.

   8.The performance against the adopted budget for the four core services for the secondary cities for the second quarter 2019/20 also shows surpluses against billed revenue without taking into account the collection rate:

• Water revenue billed was R3.8 billion against expenditure of R3 billion;
• Energy sources revenue billed was R9.6 billion against expenditure of R8.9 billion;
• The revenue billed for waste water management was R1.5 billion against expenditure of R403 million; and
• Levies for waste management billed were R1.2 billion against expenditure of R831 million.

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