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 2010/11 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.
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.
The data for the analysis used in the tabled report was extracted from the 2010/11 Municipal Budget Information: Third Quarter Financial Results as at 31 March 2011. We alluded to the poor financial reporting of some municipalities on critical aspects of their budgets in the past. Unfortunately the lack of performance in this area still remains a bone of contention. Of the 61 municipalities, 26 have not uploaded their operating adjustment budget returns and 21 municipalities have not uploaded their capital adjustment budget returns. This limits the assessment of the municipality’s performance in terms of revenue and expenditure against the adjusted budget. Also of concern is the credibility and accuracy of some information provided. We have to get this right if we were to get a true reflection of service delivery at grassroots level.
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 generated at least 75% of their budgets as at the end of quarter three.
Municipal expenditure performance: 2009/2010
B.1. Operational backdrop
The aggregated cumulative revenue collection at the end of the third quarter of the 2010/11 municipal financial year was below the expected benchmark of 75%. Municipalities collected R26.5 billion (70.7%) of a total adjusted revenue budget of R32.4 billion.
B.2. Operating revenue and expenditure
- Most expenditure was on Other Expenses (42.3%), followed by Employee Related Costs (29.8%) and Bulk Purchases (27.5%).
- The least expenditure was recorded for bad and doubtful debt (R105.4 million or 0.5%). This is due to the fact that a number of municipalities make adjustments to their bad and doubtful debt at the end of the financial year.
- A breakdown of the operating revenue generated indicated that Billed Service charges contributed the most towards the total revenue (43.3%, followed by Other Own revenue and Billed Property rates, which contributed 39.4% and 17.3% respectively, at the end of the third quarter.
- Billed Service charges that constitute the largest revenue stream includes revenue from Electricity, Water, Sanitation and Refuse removal.
- The revenue generated from Billed Property rates is expected to increase from the 2011/12 financial year as some municipalities were given an extension until 1 July 2011 to implement the Municipal Property Rates Act (MPRA) from the initial implementation date of 1 July 2009.
- Other Revenue comprises mainly transfers: grants from national and provincial spheres of government.
- As expected eThekwini Metro accounts for the bulk of revenue (60.1%) generated in the province.
- As indicated in Annexure A, 28 municipalities recorded revenue below 75% when compared to their respective adjusted budgets. Noticeably is the slow collection of revenue in Nongoma at 21.5%, Msinga (38.3%) and Ugu District Municipality (38.4%) generated the least revenue.
- While 10 municipalities, namely Vulamehlo (127.4 %), Impendle (132.7 %), Indaka (143.8 %), uMmzinyathi (185 %), eDumbe (102.2 %), Jozini (127.9 %), Mfolozi (162.9 %), Nkandla (107.2 %), Mandeni (125.6 %) and Umzimkulu (117.2 %) have generated revenue in excess of their adjustment budget, the credibility of the data submitted by these municipalities are questioned.
The operating expenditure was substantially lower than the revenue performance at the end of the third quarter. Only 63.7% or R22 billion of the total operating budget of R34.6 billion was spent.
Operating expenditure per district and local municipalities:
- The provincial aggregated Employee Related Costs (29.8%) was within the generally accepted norm of 30% of the total operating expenditure. However, some districts, Ugu District (49.8%), uMmkhanyakude District (49.7%) and Zululand District (41.3%) recorded higher spending against this item.
- uMdoni and Msinga Municipalities recorded the least on their total operating expenditure at 30.5% and 32.2% respectively; this could be due to the non submission of all the required monthly returns (See Annexure B).
- While three municipalities, namely Impendle (140.9%), Indaka (135.4%) and Mfolozi (183.8%) have exceeded their operating expenditure adjustment budget, doubt is again cast on the accuracy of the figures submitted. Despite Mfolozi Municipality adjusting their budget tpwards, it still recorded an over expenditure.
- Impendle and Indaka Municipalities were amongst the municipalities that did not submit their adjusted budget returns.
Table 1: Capital Revenue and Expenditure
| R thousands | 2010/11 | |||||||
| Budget | First quarter | Second quarter | Third quarter | |||||
| Main appropriation | Adjusted Budget | Actual Expenditure | 1st Q as % of Main appropriation | Actual Expenditure | 2ndQ as % of Main appropriation | Actual Expenditure | 3rdQ as % of Main appropriation | |
| Capital Revenue and Expenditure | ||||||||
| Sourceof Finance | 9 731 440 | 9 373 375 | 1 275 309 | 13.1% | 1 959 552 | 20.1% | 1 049 180 | 11.2% |
| External loans | 597 925 | 430 129 | 33 909 | 5.7% | 60 686 | 10.1% | 15 319 | 3.6% |
| Internal contributions | 3 169 384 | 3 262 047 | 355 778 | 11.2% | 721 689 | 22.8% | 656 927 | 20.1% |
| Transfers and subsidies | 5 630 493 | 5 115 166 | 837 130 | 14.9% | 1 114 595 | 19.8% | 335 223 | 6.6% |
| Other | 333 639 | 566 032 | 48 493 | 14.5% | 62 583 | 18.8% | 41 711 | 7.4% |
| Capital Expenditure | 10 163 030 | 9 867 964 | 1 233 845 | 12.1% | 2 012 670 | 19.8% | 1 112 146 | 11.3% |
| Waterand Sanitation | 3 317 850 | 2 850 874 | 387 960 | 11.7% | 719 916 | 21.7% | 364 797 | 12.8% |
| Electricity | 1 191 368 | 1 095 857 | 98 113 | 8.2% | 137 724 | 11.6% | 112 443 | 10.3% |
| Housing | 1 482 290 | 1 358 105 | 278 892 | 18.8% | 404 994 | 27.3% | 201 221 | 14.8% |
| Roads, pavements, bridges and storm water | 1 682 147 | 1 782 919 | 264 706 | 15.7% | 397 943 | 23.7% | 155 802 | 8.7% |
| Other | 2 489 374 | 2 780 207 | 204 174 | 8.2% | 352 092 | 14.1% | 277 885 | 10.0% |
C.1. Provincial total capital revenue
Municipalities are still very much grant reliant for the implementation of capital projects, as this item was mainly funded through Grants
C.2. Provincial total capital expenditure
Table 2: Capital expenditure per item and per district
| R'000
| Original Budget | Adjusted budget | YTD | % Spent | Detail | ||||
| Water & Sanitation | Electricity | Housing | Roads/ Pavements | Other | |||||
| eThekwini | 5 370 572 | 5 125 772 | 2 687 679 | 52.4 | 840 188 | 277 142 | 827 921 | 307 543 | 434 885 |
| Ugu | 1 005 081 | 967 088 | 407 438 | 42.1 | 126 964 | 1 408 | 22 518 | 192 930 | 63 618 |
| Umgungundlov u | 495 429 | 497 297 | 109 271 | 22.0 | 31 746 | 6 379 | 1 540 | 47 283 | 22 323 |
| Uthukela | 440 763 | 505 781 | 155 137 | 30.7 | 61 944 | 15 763 | 4 748 | 43 985 | 28 697 |
| Umziny athi | 282 464 | 273 964 | 150 798 | 55.0 | 57 278 | 1 145 | - | 46 182 | 46 193 |
| Amajuba | 319 585 | 319 585 | 62 428 | 19.5 | 543 | 5 208 | 35 | 29 578 | 27 064 |
| Zululand | 372 170 | 370 897 | 136 359 | 36.8 | 73 451 | 7 751 | 1 211 | 32 363 | 21 583 |
| Umkhany akude | 282 865 | 251 022 | 98 357 | 39.2 | 30 344 | 3 589 | 650 | 11 912 | 51 862 |
| uThungulu | 487 617 | 487 953 | 154 435 | 31.6 | 83 379 | 10 648 | (2 425) | 25 789 | 37 044 |
| Ilembe | 676 028 | 670 605 | 187 223 | 27.9 | 77 047 | 8 091 | 24 956 | 39 719 | 37 410 |
| Sisonke | 430 456 | 398 000 | 209 541 | 52.6 | 89 791 | 11 160 | 3 952 | 41 168 | 63 470 |
| Total | 10 163 030 | 9 867 964 | 4 358 666 | 44.2 | 1 472 675 | 348 284 | 885 106 | 818 452 | 834 149 |
Source : NT Publication
- The third quarter results show that capital amounts spent by municipalities at a provincial level is below the straight line projection of 75% and even lower than the 66% recorded for the same period last year. Only R4.4 billion or 44.2% of the R9.9 billion adjusted budget for the 2010/11 financial year was spent.
- All ten districts, as well as the eThekwini Metro spent below the 75% straight-line projection.
- Excluding eThekwini, a total of R632.5 million was spent on Water & Sanitation (32.3%).
- Electricity accounts for 8% (R348.3 million of the capital expenditure.
- Total expenditure on Roads and Pavements amounted to R818.5 million (18.8%).
- Other Expenditure (19.1% or R834.1 million) includes projects like community halls, crèches,libraries, taxi ranks, etc.
- Ugu district spent the most on Water and Sanitation (R127 million) and Amajuba the least (R543 000). However, again the figures for the latter may not be accurate due to non- submission of certain MFMA monthly returns.
- Of the district municipalities, uThukela, uThungulu, iLembe and Sisonke recorded the highest levels of spending on electricity.
- uMkhanyakude spent the least on Roads and Pavements (R11.9 million or 43.3%)
- uThungulu reflected a negative expenditure on Housing due to a negative amount reported by uMhlathuze Municipality (capturing error).
Table 3: Cash receipts and payments
| R thousands | 2010/11 | |||||||
| Budget | First quarter | Second quarter | Third quarter | |||||
| Main appropriation | Adjusted Budget | Actual Expenditure | 1st Q as % of Main appropriation | Actual Expenditure | 2nd Q as % of Main appropriation | Actual Expenditure | 3rd Q as % of Main appropriation | |
| Cash Receipts and Payments
| ||||||||
| Opening Cash Balance | 3 528 978 | 3 543 089 | 2 574 413 | 73.0% | 3 399 557 | 96.3% | 3 668 158 | 103.5% |
| Cash receipts by source | 37 312 452 | 38 197 750 | 11 121 628 | 29.8% | 10 050 109 | 26.9% | 9 621 225 | 25.2% |
| Statutory receipts (including VAT) | 5 346 087 | 5 706 152 | 287 455 | 5.4% | 288 022 | 5.4% | 259 368 | 4.5% |
| Service charges | 16 002 826 | 15 962 875 | 5 592 760 | 34.9% | 6 337 060 | 39.6% | 5 549 190 | 34.8% |
| Transfers (operational and capital) | 9 741 377 | 10 032 458 | 3 571 969 | 36.7% | 3 359 969 | 34.5% | 2 679 137 | 26.7% |
| Other receipts | 3 146 906 | 3 225 815 | 484 777 | 15.4% | 421 361 | 13.4% | 811 570 | 25.2% |
| Contributions recognised - cap. & contr. assets | - | 15 620 | - | - | - | - | - | - |
| Proceeds on disposal of PPE | 27 019 | 121 970 | 1 588 | 5.9% | 11 380 | 42.1% | 851 | .7% |
| External loans | 2 698 380 | 2 761 985 | 1 040 539 | 38.6% | 39 000 | 1.4% | - | - |
| Net increase (decr.) in assets / liabilities | 349 858 | 370 875 | 142 539 | 40.7% | (406 683) | (116.2% ) | 321 109 | 86.6% |
|
| ||||||||
| Cash payments by type | 37 241 934 | 37 903 666 | 10 296 483 | 27.6% | 9 781 508 | 26.3% | 7 965 067 | 21.0% |
| Employee related costs | 8 523 296 | 8 759 424 | 2 029 733 | 23.8% | 2 392 782 | 28.1% | 2 012 354 | 23.0% |
| Grant and subsidies | 527 840 | 593 308 | 75 135 | 14.2% | 69 022 | 13.1% | 45 225 | 7.6% |
| Bulk Purchases - electr., water and sewerage | 8 017 585 | 8 343 638 | 743 062 | 9.3% | 522 269 | 6.5% | 468 204 | 5.6% |
| Other payments to service providers | 9 955 917 | 10 298 085 | 5 343 544 | 53.7% | 4 706 625 | 47.3% | 3 957 364 | 38.4% |
| Capital assets | 8 034 238 | 7 535 920 | 1 638 441 | 20.4% | 1 261 063 | 15.7% | 987 344 | 13.1% |
| Repayment of borrowing | 702 130 | 722 613 | 118 195 | 16.8% | 234 736 | 33.4% | 216 402 | 29.9% |
| Other cash flows / payments | 1 480 928 | 1 650 678 | 348 372 | 23.5% | 595 010 | 40.2% | 278 173 | 16.9% |
| Closing Cash Balance | 3 599 496 | 3 837 173 | 3 399 557 | 94.4% | 3 668 158 | 101.9% | 5 324 317 | 138.8% |
- By the end of March 2011, cash inflows amounted to R30.8 billion, while cash payments of R28.8 billion were made. National Treasury considers it prudent for a municipality to have cash coverage for at least three months to cover fixed operating expenditure.
- The bulk of cash receipts came from Service Charge (R17.5 billion or 56.8%). Transfers were the second largest contributor, contributing R9.6 billion or 31.2%.
- Other payments to service providers which includes creditors, external loans and statutory payments contributed the most to the outflows of cash, amounting to R14 billion (50% of the cash payments).
- Payments relating to Employee related costs (22.9%) and Capital assets (13.9%) were the second and third largest contributors to the total cash payments.
- Grants and subsidies contributed the least amount to the cash outflows (R189.4 million or 0.7%).
- The total municipal debt owed to municipalities amounted to a staggering R8.4 billion – a slight decrease from the second quarter (R8.5 billion). However, there are 10 municipalities that did not report on their outstanding debt (See Annexure D) and the total amount of debt owed could be slightly higher.
- 66.9% of the total debt was collectively owed to eThekwini (R4.8 billion), Msunduzi (R743 million) and uMhlathuze (R112.1 million).
- Three districts have significantly high debt, totalling R2.2 billion: uMgungungdlovu (R1.1 billion), Amajuba (R668.2 million) and uThukela (R486.2 million). Municipal debt is influenced by numerous factors: level of indigence, unemployment rate, migration of labour and dependence on state social grants. Furthermore, ineffective billing systems still persists at municipalities across the Province which further impedes on the situation.
- Zululand has the lowest outstanding debtors balance and also shows a decline in outstanding debtors from the second quarter. However, this is mainly because debtors’ information is incomplete for eDumbe, Ulundi and the Zululand District municipality.
- The bulk of the debt is owed for Property rates (34.4%). As a municipal tax the municipalities should implement effective credit control and debt collection strategies to improve the cash flow position.
- 80% or more of 24 municipalities had outstanding debt in the Over 90 Days category. This may be irrecoverable and may have to be written off. It is crucial that effective debt collection policies and strategies should be put into place.
- The largest portion of debtors is Households (46.9%), followed by Other (28.2%), which include industrial, smallholdings and farming properties. Government debt (13.6%) includes debt owed by national & provincial departments.
- To assist municipalities in recovering debt owed by government departments, Provincial Treasury has established a task team to facilitate payments to municipalities by provincial departments and resolving disputes. This process has reduced provincial government debt to municipalities significantly. When comparing the municipal debt situation in June 2010 with the debt situation at the end of March 2011 the significant improvement is evident. The arrear accounts for provincial departments have decreased by 81% and those of national departments by 56%.
F.1. Municipal Support Programme: Financial Reporting
In keeping with the Provincial Treasury’s mandate to assist and support municipalities in strengthening and building their financial management capacity, the KZN Provincial Treasury developed a financial management tool to facilitate:
- Monthly reconciliation processes.
- Electronic working paper file management for financial year-end processes within the municipal environment.
- Electronic Tracking Tool Implementation Workshops were conducted at three districts (uMgungundlovu, Ugu and iLembe) in February and March 2011: In total 54 municipal officials, including the Chief Financial Officers and Finance Managers (representing 20 municipalities attended).
During the third quarter Internal Audit facilitated 9 Risk and Control Assessments workshops at the following municipalities:
- Jozini
- Big 5 False Bay Richmond Umhlabuyalingana Uthukela Maphumulo Uphongolo
- Indaka
- Dannhauser
F.3. Banking and cash management
In terms of Section 11(4) of the MFMA, 27 municipalities had not submitted the third quarterly consolidated report of all withdrawals. The banking section of Provincial Treasury conducted 20 municipal site visits and, trained municipal staff on compliance reporting and provided them with Municipal Investment Regulations and a generic investment policy.
Conclusion
The report highlights the emphasis that the Provincial Treasury has been putting on accurate reporting. We will not be able to in-turn assist our municipalities optimally if they do not comply with the financial reporting. Further assistance has now been provided to track and facilitate the financial reporting process.
Municipalities also have to ensure that they recruit and train suitable personnel in the areas such as debt recovery and capital spending. It is a shame when money for much-needed capital projects is returned because of a failure to spend it on time.
To this end the Provincial Treasury investigated certain areas of Supply Chain Management. As a result a template for BEE spend-reporting for the Provincial Departments and Municipalities has been designed, while a draft Provincial SCM Policy was also produced and sent to all municipalities (and provincial departments) for comment before it will be sent for approval/adoption by the Provincial Cabinet. This process will be finalised by the end of the 1st Quarter of the 2011/12 financial year.
From the assessments conducted it is clear that the single biggest challenge for the municipalities adhering to prescripts is the lack of capacity (human resource) of these municipalities to implement the SCM systems as prescribed.
Provincial SCM has embarked on a process to ensure compliance with the provisions of Regulation 49 and 50 of the MFMA, that is, the provision of mechanism for the resolution of disputes, objections, complains and queries raised by the members of the public relating to any process of awarding a contract by the municipalities. In the event that after 60 days the municipality has failed to resolve the matter, then the complainant is allowed to approach the Provincial Treasury for adequate recourse to the objection.
The establishment of the Provincial Infrastructure Crack Team, comprising 18 experts in various technicla disciplines, will also go a long way in addressing infrastructure budgets that were not being spent, as well as ensuring that government gets value for money, quality and transferring skills to emerging constructors working with government.
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.
