Madam speaker
Deputy speaker
Honourable premier
Councillors in the executive
Honourable members
Ladies and gentlemen
Introduction
The fourth quarter budget performance review I am tabling today covers the financial performance of delegated municipalities in KwaZulu-Natal. There are 58 municipalities that are delegated by National Treasury to the Provincial Treasury. The delegation means that the Provincial Treasury has to assist and monitor the financial affairs of these municipalities.
There are three non-delegated municipalities namely; eThekwini, uMsunduzi and uMhlathuze. These municipalities are monitored by National Treasury. I must indicate upfront that the details in this report have not been audited by the Auditor General.
This comprehensive review report consists of seven chapters. Chapter one gives an executive summary. Chapter two looks at the socio-economic profile at a district level. This profile includes the demographics, economic performance, income distribution, poverty rates and unemployment statistics. Chapter three presents the analysis of compliance with the budget cycle for 2009/10. It also summarises the 2008/09 expenditure patterns in terms of both operating and capital expenditure covering all ten districts.
The same chapter details debt and revenue management and the provision of bulk services across the districts and highlights particular municipalities in these districts that either have problems in managing their revenue and debt or have good revenue and debt management practices. Chapter four unpacks each municipality in the districts in terms of their budget performance. Chapter five contains an analysis of Municipal Finance Management Act (MFMA) compliance. It further details expenditure on conditional grants, such as the financial management grant (FMG), the municipal systems improvement grant (MSIG) and municipal infrastructure grant (MIG). This chapter also contains a section on supply chain management issues.
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Chapter six deals with the municipal support programme in terms of generally accepted accounting principles (GRAP) conversion and other budget reforms initiated by the Provincial Treasury. Chapter seven is the conclusion.
There is growing public awareness of the financial problems at municipalities. This is partly as a result of greater media coverage, and partly due to the fact that the financial situation of many municipalities has deteriorated significantly over the last three years. The failures are becoming increasingly visible and are impacting directly on service delivery across South Africa.
Madam speaker, the deterioration in local government finances and financial management is of such a scale that it requires national and provincial government to adopt a far more proactive approach to assisting and intervening in municipalities. Poor financial management capacity in budget and Treasury offices, political interference in financial management and procurement operations of municipalities, mayors and municipal councils taking decisions and acting in ways that are inconsistent with principles of good governance all combine to compromise the sustainability of municipal finances. It is clear from the KwaZulu-Natal municipal finance close-out report for the 2008/09 financial year that most local governments are facing a financial crisis.
Economic landscape
The current global economic downturn presents new economic and administrative challenges over and above the historical challenges municipalities are facing. We are all aware of the fact that KwaZulu-Natal has been the biggest casualty of this economic downswing with a contraction in the gross domestic product (GDP) regional of 9.7 percent in the first quarter of 2009. We did much better in the second quarter, it is estimated that provincial GDP increased by 3.7 percent during the second quarter of 2009. While some sectors are beginning to show signs of recovery it will be several months before we see a robust economic recovery.
While poverty levels dropped on average at a rate of 2.2 percent each year between 2002 and 2007, high levels of unemployment and poverty still persist in all district municipalities stretching the development chasm. More than half of the households living in Umzinyathi, Umkhanyakude, Zululand, Sisonke and UThukela earned R1 500 or less per months between 2002 and 2008. The KwaZulu-Natal provincial government’s main objectives (as spelled out in the provincial spatial economic development strategy (PSEDS), is to have achieved the following by 2014:
* an eight percent economic growth
* halve unemployment (to 18.8 percent) and
* bring down poverty (to 28.8 percent)
As the sphere of government closest to our communities, municipalities are important players in ensuring that the province achieves these goals. Now, more than ever before municipalities need to closely examine socio-economic factors to be able to respond appropriately to these challenges. Until we begin to see more district municipalities intensifying and redoubling their efforts towards the realisation of their targets, the province may not meet the set targets by 2014.
Municipal expenditure performance: 2008/09
Capital expenditure
A key intervention for local economies to break out of the poverty trap is infrastructure investment. However, the majority of our municipalities did not make use of this intervention. We are extremely concerned about the constantly high under-spending of capital budgets in most of the municipalities. Four municipalities (Msinga, eMadlangeni, Mbonambi and Ubuhlebezwe) did not report on their capital expenditure. Of the 58 municipalities delegated to the Provincial Treasury, the 54 reporting municipalities, on average only spent 60.4 percent of the R3,9 billion adjusted capital budget. In absolute monetary terms, R1,5 billion capital budget was not spent in 2008/09. The graph below clearly illustrates this under spending.
The bulk of capital expenditure was on water (R937,1 million or 40.1 percent of total capital expenditure). This suggests that water has been the major integrated development plan priority for all districts. According to the water and sanitation audit report that was released in March this year, KwaZulu-Natal has the third biggest water backlogs in the country, with 463 650 households not having access to piped water. We cannot afford to under spend capital budgets.
Under expenditure occurred mainly because of:
* poor capital expenditure planning
* poorly managed procurement processes and
* inappropriate political interference in both the capital planning and procurement processes.
We will never catch up with the backlogs in our previously under-serviced areas if we continue to under spend on capital. Our municipalities MUST adopt long-term planning for infrastructure spending and introduce monitoring systems that will provide early warning signals to eliminate under spending of capital budgets. It is also important to ensure that technically skilled officials are employed to oversee project implementation.
Municipal operating expenditure
Madam speaker, I must indicate my disappointment at four municipalities; Umdoni, eMadlangeni, Mbonambi and Ubuhlebezwe for not submitting all their information and reports despite extensive support by the provincial Treasury.
A sharp contrast exists between the spending patterns of the operating and capital budgets. Of the R6,9 billion adjusted operating budget, R6,1 billion (88.5 percent) was spent. The largest expenditure on operations is in the category other expenses (R3,2 billion or 51 percent), followed by employee related costs at 30.6 percent as indicated in the pie chart below. This category includes rental, capital charges and hire charges.
We are worried about the low spending on repairs and maintenance at six percent of operating expenditure. Ideally, about 10 percent of total operating expenditure should be set aside for maintenance if we are to preserve the capital asset base. Increased expenditure on bulk services is also necessary to reduce and finally eliminate service backlogs. On average only 12 percent is spent by our municipalities on bulk services.
Outstanding municipal debt
While the slow down in the economy contributes to increased municipal debt, it can only be a partial explanation. The real reason for increased municipal debt is lack of proper billing and debt management systems. The total amount owing to municipalities in KwaZulu-Natal (including eThekwini, uMhlathuze and Msunduzi) has grown from R2,7 billion in 2004/05 to R7,6 billion as at 30 June 2009. This represents an increase of 181.5 percent from 2004/05 to 2008/09 compared to 76.6 percent increase in the national total. Similarly, the increase in the outstanding debt for KwaZulu-Natal from 2007/08 to 2008/09 at 33.3 percent has been significantly higher than the national total at 11.8 percent. The graph below indicates this rising trend of municipal debt.
It should be borne in mind that this is not the true debt position as 14 municipalities did not report on their debtors. These 14 municipalities are Umdoni, Umzumbe, Ezingolweni, Nquthu, Umvoti Amajuba Umhlabuyalingana, Umkhanyakude, Mbonambi, Nkandla, Sisonke, eMadlangeni, Ulundi and uMgungundlovu.
A large portion of the debt, which runs into billions are attributable to household debtors for services rendered. The Provincial Treasury is currently assisting some municipalities with debt recovery.
Cash flow position
The growing increase in outstanding debt has major implications for the cash flow of our municipalities. It is generally accepted that a prudent level of cash coverage should be three months of average operational expenditure. The majority of municipalities have cash coverage ratios of less than one month, a very precarious financial position to be in.
Data coming from our municipalities indicate that each one of the ten districts has at least three municipalities with cash flow problems. In terms of the cash flow coverage ratio, one category A has less than three months cash in hand to cover its operational expenditure. Two secondary cities category B municipalities have less than one month’s cash in hand to cover its operational expenditure.
Of the 47 category B municipalities, 49 percent have less than one month’s cash in hand to cover its operational expenditure. For the category C municipalities, 60 percent of the ten municipalities have less than one month coverage of operational expenditure. At a very minimum a municipality should always maintain a positive cash position. A negative cash flow position is a strong indicator of financial distress. Furthermore, a municipality needs to have enough cash on hand to meet its monthly payments as and when they are due. The level of cash coverage is especially important should the municipality be faced with a situation that threatens revenue collection.
Any one of the following events could push these municipalities into a negative cash position:
* deterioration in revenue collections due to the impact that the worsening economic situation and the rising rates and tariffs have on household budgets
* the need to pay suppliers, especially contractors responsible for capital projects (whose billings are often lumpy and come at year end)
* the need to finance the cash flow difference between paying for the increased cost of bulk electricity or water and the collection of revenues from customers
* any major breakdown in service delivery resulting in non-supply (especially water and electricity), and therefore no revenue or
* a rate payers or consumers boycott.
There is also substantial evidence that municipalities are underperforming in relation to their fiscal capacity and are:
* failing to adopt progressive rates and tariffs structures
* failing to increase rates and tariffs in line with increases in the cost of services
* not targeting properly the free basic services and
* failing to manage consumer debtors properly.
Madam speaker, we are also getting worried at the increasing number of municipalities that rely significantly on national government grants. According to our analysis, the number of category B municipalities that rely on national transfers for more than 50 percent of their revenues has increased from 24 in 2004/05 to 40 in 2008/09. Among the category C municipalities, nine out of the 10 received more than 50 percent of their revenue from national transfers in 2008/09. This is a clear indication that our municipalities lack the capacity and or ability to generate their own revenue.
The use of overdraft
Despite repeated warnings from both the Provincial and National Treasuries to phase-out the use of overdraft facilities by 1 July 2008, in line with the MFMA, 17 municipalities reported negative closing bank balances for the fourth quarter, namely; Vulamehlo, Umzumbe, uMshwathi, uMngeni, Mpofana, Richmond, Ukhahlamba, uThukela, uMvoti, Newcastle, uPhongolo, Ulundi, Zululand, Jozini, UMkhanyakude, Umlazi and iLembe.
On the other hand a number of municipalities still fail to comply with section 11(4)(b) of the MFMA that requires them to report on their quarterly bank withdrawals from their bank accounts to the Provincial Treasury. Madam speaker, this is a serious breach of the law.
Assistance and commitment from Provincial Treasury
Municipal Support programme
Madam speaker, in line with the provision of the Constitution (section 154 (1)) Provincial Treasury is strengthening its support to municipalities. This section requires national government and provincial governments to support and strengthen the capacity of municipalities to manage their own affairs, to exercise their powers and to perform their functions. To this end, the Provincial Treasury developed a focused Municipal Support programme (MSP). The main objective of this programme is to support municipalities where their financial sustainability is threatened and implement turnaround strategies that would ensure the municipalities remain financially viable. The programme has been successfully implemented in a number of municipalities.
Through this programme, Treasury is assisting with the implementation of the generally recognised accounting practice (GRAP) at five municipalities, namely; Ezingolweni, Greater Kokstad, Big Five False Bay, uMtshezi and UThukela. We hope to see an improvement in the audit outcomes of these municipalities in the years ahead. Support is also being rendered to Hlabisa, Nquthu and Nkandla. It is of great concern to me that we can only effectively support a limited number of the municipalities that requires assistance due to budget constraints.
Guidelines for budget processes of 2009/10
In line with chapter five of the MFMA, the Provincial Treasury is committed to supporting and assisting our municipalities in compiling credible budgets that seeks to address the needs of their communities. To this end we have issued guidelines for the budget process for 2009/10 that strategically assists municipalities to optimally implement priorities. These guidelines create a consultative approach to determining priorities, policies, budgets and financial management and will also assist the mayors of municipalities to effectively discharge their role and responsibilities.
Budget compliance review 2009/10
The compliance review for 2009/10 has shown slight improvement. Only one municipality (Ndwedwe), compared to three in the previous year, failed to table its draft budget by 31 March 2009 as required by section 16 of the MFMA. Six municipalities (Imbabazane, Umvoti, Dumbe, Nongoma, Zululand and eMadlangeni) did not submit copies of their budgets to the Provincial Treasury for evaluation whilst the budgets of 22 municipalities could not be evaluated as these were not submitted in prescribed format.
Although a number of municipalities did not provide for wider stakeholder and community consultation during their budget processes, they all have managed to adopt their final budgets for 2009/10 before the beginning of the financial year. This is clearly a marked improvement from the previous financial years.
Despite this positive trend, in terms of budget preparation, our municipalities still face serious challenges ranging from proper budgeting, financial management, supply chain, inability to attract suitably qualified personnel, cash-flow management and service delivery. As a result of these challenges National and Provincial Treasuries have developed a 16-priorities MFMA toolkit. As indicated in table 5.1 of the main report (page 148) these priorities include the following:
* establishing budget and treasury offices with appropriate skills
* improving preparation and implementation of multi-year budgeting
* establishment of functional internal audit units and audit committees and
* upgrading and automating systems to deliver reports and improve data quality
It is our view that this toolkit will improve systems, structures, processes, internal controls and compliance with the MFMA.
We need changes
Yunus Carrim, Deputy Co-operative Governance Minister, speaking at the conference of the Institute of Municipal Finance Officers stated that unless financial management and fiscal governance in municipalities is improved, government could not improve service delivery and development significantly.
After all we made a commitment during President Jacob Zuma’s inauguration in May this year that, “for as long as there are communities without clean water, decent shelter or proper sanitation, we shall not rest, and we dare not falter in our drive to eradicate poverty”.
Madam Speaker, it is now my honour to formally table in this house the municipal finance fourth quarter review report for consideration.
Thank you.
Issued by: Department of Treasury, KwaZulu-Natal Provincial Government
15 October 2009
