Introduction
Honourable Speaker, I table this report as required by section 71 (7) of the Municipal Finance Management Act, No 56 of 2003. The first 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, uMsunduzi and uMhlathuze. The latter are monitored by the National Treasury.
The first quarter budget review covers the revenue and expenditure for the first three months of the 2009/10 municipal financial year, which commences on 1 July of each 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.
Last year an alarm bell was sounded to alert us about the poor financial reporting of some municipalities. Unfortunately, this first quarter 2009/10 Review again indicates that a number of municipalities failed to report on critical aspects of their budgets.
Not only do these municipalities deprive themselves of an opportunity to be assisted, but by failing to submit information they also distort the overall picture of municipal finances. With data outstanding, it becomes problematic to assess the true position of municipalities in the province.
Another disturbing observation is the lack of credibility and accuracy of some information provided. Some items simply seem unrealistic. In addition, too many items seem to be placed without an explanation in the “Other” category. The mechanical straight line method of projection was used as the benchmark for expenditure and revenue at the end of quarter one. In terms of the straight-line method of projection, all municipalities should have spent and collected at least 25 percent of their budgets as at the end of quarter one.
Municipal expenditure performance: 2009/10
Operational backdrop
The assessment of the municipal financial performance took place at a time when the recession was hitting South Africa and KwaZulu-Natal in particular. It was expected that revenue collection results for the first quarter would provide first indications of the effects of the economic recession on municipalities.
However, with revenue collections being on par with the expected benchmark of 25 percent, the impact of the recession on municipal revenues is at this stage difficult to determine. The satisfactory collection rate in terms of operating revenue could largely be as a result of transfers made by national and provincial government. Municipalities have also implemented the Municipal Property Rates Act (MPRA) and it is a reasonable expectation that a noticeable increase in revenue from this source should be observed.
Operating revenue and expenditure:
Provincial total operating revenue
Figure one: first quarter operating revenue collected per source as a percent of total operating revenue collected for the quarter:
* Property rates: 20.1 percent
* Service charges: 38.5 percent
* Other own revenue: 41.4 percent
Municipalities collected R8.1 billion of a total revenue budget of R32.7 billion. Of the total operating revenue collected at the end of the first quarter ‘other own revenue’ sources contributed the most towards the total revenue (41.4 percent), followed by service charges (38.5 percent) and property rates (20.1 percent).
Operating revenue per district and local municipalities
* 11 municipalities did not generate any revenue from property rates at the end of the first quarter. These municipalities are Vulamehlo, uMzumbe, Impendle, Indaka, Nqutu, eMadlangeni, eDumbe, uMhlabuyalingana, Mfolozi, Maphumulo and Ingwe.
* While the provincial average revenue collection met the straight line 25percent benchmark, we are concerned about the slow collection of revenue at Umdoni (14.5 percent), uMuziwabantu (11.2 percent), Nqutu (1.6 percent), Amajuba (14 percent), Nongoma (1.6 percent), Mtubatuba (13 percent) and iLembe district municipality (12.9 percent).
* With Ntambanana reflecting a collection of 105.8 percent and Nongoma and Nqutu collecting at 1.6 percent one suspects that the budgets were either unrealistic or the uploaded data is not credible and accurate.
Figure two: first quarter operating expenditure per item as a percent of Total Operating Expenditure incurred for the quarter:
* Employee related costs: 25.3 percent
* Provision for working capital: one percent
* Repairs and maintenance: 8.9 percent
* Bulk purchases: 29.8 percent
* Other expenditure: 35 percent
Municipalities spent R6.8 billion (22.8 percent) of their total adopted budget of R29.8 billion. Most was spent on ‘other expenditure’ (35 percent) and bulk purchases (29.8 percent). The increase of the bulk price of electricity could have contributed to the relatively high bulk purchases. Operating expenditure was less than revenue collected, resulting in a budgeted provincial surplus of R1.3 billion
* Seven municipalities (Impendle, eMadlangeni, eDumbe, uMkhanyakude, Mfolozi, Ingwe and Sisonke) failed to report on their operating expenditure for the quarter under review
* At a provincial level, expenditure on employee related costs (25.3 percent) was within the accepted notional norm of 30 percent
* At district level, Ugu, Umzinyathi and uMkhanyakude spent 41 percent, 40 percent and 49.6 percent respectively on this item (employee related costs) as at the end of the quarter.
* Of concern is the fact that only 8.9 percent of the reported total expenditure was spent on repairs and maintenance. I alluded to the impact of deferred maintenance on the provincial budget in my budget speech. “A stitch in time saves nine.” Let us try to stop further deterioration of infrastructure by fixing existing infrastructure in time.
* Municipalities did not meet the 25 percent benchmark and only spent 19.2 percent of the capital budget of R10.7 billion allocated for infrastructure projects. Only eThekwini Metro (25.1percent) and uMgungundlovu district (20.4 percent) spent above this average. This is a bone of contention. With capital expenditure for the first quarter of 2009/10 mainly funded through grants and subsidies (50.5 percent) and internal contributions (44.7 percent), we are concerned that the municipal infrastructure grant (MIG) tranches of the capital budget may be withheld if it remains unspent.
Poor capital expenditure planning by municipalities is mainly at the root of under spending of capital budgets. One cannot wait until the beginning of the financial year to start planning; it needs to be planned well in advance. This slow start delays the delivery of infrastructure to provide basic services and exacerbates the current backlogs.
It is imperative that municipalities adopt appropriate monitoring systems and take corrective steps where under spending is recorded. Crucial to this process is the appointment of skilled technical staff.
Figure four: first quarter capital expenditure per items as percentage of total capital expenditure incurred for the quarter:
Water and sanitation: 34.5 percent
Electricity: 6.7 percent
Housing: 15.3 percent
Roads, pavements, etc: 10.6 percent
Other: 32.9 percent
At a district level 34.5percent of the total capital expenditure was spent on water, while 32.9percent was spent on other capital projects. eThekwini Metro and five districts, namely uThukela, uMzinyathi, Zululand, uMgungundlovu and uThungulu reported expenditure on electricity projects.
Compared to the capital expenditure reported at the end of the first quarter of the 2008/2009 financial year (12.6 percent), capital expenditure increased by 6.6 percent, bringing the total to 19.2 percent; as mentioned before this is still below the required 25 percent benchmark for the first quarter. In addition seven municipalities failed to report on capital spending: Umtshezi, Msinga, eMadlangeni, eDumbe, Mandeni, Ingwe and Sisonke.
Cash receipts and payments
* More money spent than money earned is a recipe for disaster. At the end of the first quarter, cash receipts of R15.4 billion were reported, while payments to the amount of R15.9 billion were made. If the net negative cash flow position (now R539.1 million) continues to grow, it would adversely affect municipalities’ sustainability.
* Three municipalities did not report on their Cash Receipts and Payments, namely eDumbe, Ingwe and Sisonke.
Outstanding municipal debt:
Water: 22.7 percent
Electricity: 12.3 percent
Property rates: 41.4 percent
Sanitation: 1.7 percent
Refuse removal: 2.8 percent
Other: 19.1 percent
The total municipal debt at the end of the first quarter amounted to R8.2 billion. An alarming 73.3 percent or R6 billion of the debt was in the ‘over 90 days’ category. The bulk of the debt (R3.4 billion or 41.4 percent) is owed for property rates.
* It should be noted that property rates is a municipal tax and the municipality should implement effective debt and credit control strategies to ensure constant revenue and a stable cash flow position.
Government: 4.1 percent
Business: 11.5 percent
Household: 31.4 percent
Other: 53.0 percent
The majority of debtors (53 percent) consist of other debtors. Government owes municipalities R329.3 million of which 77.2 percent has been outstanding for ‘over 90 days’. However, this may not be true debt, as some municipalities cannot establish which government department is liable for the debt.
* Furthermore, this is not the true debt position as 13 municipalities did not report on their debtors. They are uMzumbe, eZingolweni, Ugu, Indaka, eMadlangeni, Amajuba, eDumbe, uMhlabuyalingana, the Big 5 False Bay, Nkandla, Ingwe, uBuhlebezwe and Sisonke.
* eThekwini Metro and four districts have debt exceeding R300 million each, that is: eThekwini (R5.3 billion), uMgungundlovu (R869.2 million), Amajuba (R453.8 million), uThukela (R440.9 million) and iLembe (R376.1 million).
* The debt of the ‘over 90 days category (R6 billion) may be irrecoverable and consequently may have to be written off. This reduces the liquidity of the municipalities and funds for service delivery become even scarcer. The high levels of debt reflected by municipalities in KwaZulu-Natal is the result of the inability by municipalities to effectively collect revenue for services rendered. This inability could emanate from the following:
* late and inaccurate billing of consumers
* credit control policy not formulated or inefficient enforcement
* absence of an Indigent Register or outdated registers
* economic downturn and
* inefficient payment processes resulting in unallocated payments in suspense accounts that are not regularly reconciled
Assistance and commitment form Provincial Treasury
*·During the reporting quarter, the Provincial Treasury provided support and assistance to 31 municipalities. The support and assistance ranged from the assessment of the Supply Chain Management units to supply chain management policy reviews and to assistance on financial delegations.
*·As part of ongoing support, the Provincial Treasury held three municipal Supply Chain Management fora for the first quarter of 2009/10. At these workshops, presentations were also made by the Competition Commission and the national Home Builders Registration Council. Municipalities were briefed about price rigging, the role of the Competition Commission, as well as builders’ registration requirements and the benefits of free training to municipalities’ technical staff. The draft public private partnership regulations were also discussed at one of these workshops.
*·The Provincial Treasury has identified a need for councillor education on legislative provisions governing financial management in general and supply chain management processes in particular and is planning to conduct workshops in this regard.
The majority of debtors (53 percent) consist of other debtors. Government owes municipalities R329.3 million of which 77.2 percent has been outstanding for ‘over 90 days’. However, this may not be true debt, as some municipalities cannot establish which government department is liable for the debt.
Conclusion
The introduction of the Municipal Finance Management Act (MFMA) toolkit on the 16 MFMA implementation priorities by the KwaZulu-Natal Provincial Treasury in the new financial year and the ongoing support by National and Provincial Treasuries are beginning to make a slight difference with positive trends noted in some municipalities.
However, our municipalities still face serious challenges in their financial reporting and need all the assistance they can get to implement and maintain proper financial management and improve service delivery. The improvement of data quality remains a priority to ease municipal budgetary woes. Unless financial management and fiscal governance in municipalities is improved, they cannot improve service delivery and spearhead development.
The additional R5 million allocated to Provincial Treasury over the 2010/11 medium term expenditure framework (MTEF) to build capacity within the Municipal Finance unit in Provincial Treasury will certainly be used for a worthy cause. We are there to assist, support and monitor as required by the MFMA; but we are also ready to take appropriate steps if a municipality or municipal entity commits a breach of the MFMA (section 5 (4)).
I thank you.
Issued by: Provincial Treasury, KwaZulu-Natal Provincial Government
10 March 2010
Source: Provincial Treasury, KwaZulu-Natal Provincial Government
(http://www.kzntreasury.gov.za/)
