Z Mkhize: African National Congress Local Economic Development
Municipalities Summit

18 October 2007

Chairperson
Alliance
Comrades

The Provincial Treasury had to interact with various stakeholders such as
the National Treasury and research institutions to ensure a balanced report in
terms of accuracy of information and scope. The data for the analysis used was
extracted from the National Treasury database 4 September 2007. The National
Treasury is also in the process of writing a similar report for the 283
municipalities in the country.

It therefore became necessary that Provincial and National Treasuries work
closely together so as to achieve analyses based on a common set of figures
with other important stakeholders within the municipal milieu. The main
challenge encountered was in choosing between different figures supplied by
municipalities ostensibly to influence a certain ideal beneficial outcome for
each reporting municipality.

Chairperson, I am extremely concerned that a number of municipalities
continue to submit different figures of their financial information to
different users. This forces the Provincial Treasury to spend time and energy
verifying and even refining figures on behalf of certain municipalities. I must
stress that in terms of the Municipal Finance Management Act (MFMA), it is the
responsibility of the accounting officer of the municipality to submit accurate
figures. Inaccurate data submitted impacts on decisions taken by
government.

While the quality of financial information submitted by municipalities still
needs improvement, the number of compliant municipalities continues to grow. It
is anticipated that the number of reporting municipalities will increase due to
the period of reporting exemption by the national minister drawing to an end.
This will make it possible to identify and assist underperforming
municipalities.

Labour force

The economically active population for the province is estimated at three
million people (StatsSA, 2005b and 2006a). The current level of unemployment
stands at about 29,9 percent (2,2 million) as reported during 2006, which is an
increase of 100 thousand workers from the reported figure of 2,1 million during
2005. This is a slight improvement on the median unemployment rate of 34,7
percent estimate for the same period.

Unemployment and unemployment rate

The total unemployment in the province is estimated at an annual average of
963 571 people. eThekwini had the largest share of the provincial unemployment
at 37.7 percent followed by uMgungundlovu and uThungulu districts, at 12,1
percent and 8,6 percent respectively. Sisonke District at 2,4 percent has the
lowest share of the unemployed in the province.

Budget performance

The evaluation of the budget performance across the province revealed that
as with the previous financial years, the average municipality has again under
spent their capital budget for the 2006/07 financial year. There is persistent
under spending on the municipal capital budgets. Municipalities jointly spent
R3,774 billion at the end of the financial year out of the allocated R5,912
billion. The aggregated figure for the whole financial year indicates that the
joint spending by all municipalities in the ten districts, including the metro,
amount to 64 percent. In fact Mr Speaker, it is the 75 percent spending of the
capital budget by the Metro which pushed the average spending towards the 64
percent mark.

Chairperson, revised expenditure submissions from eThekwini now indicate
that they have spent 100 percent of the capital budget and deserve commending.
This has the effect of increasing the overall capital budget spending to 76
percent for the province. Of concern is that with the exclusion of the Metro,
all the remaining municipalities have jointly spent 54 percent of the capital
budget.

Since eThekwini Metro accounts for about 48 percent of the total municipal
capital budget in the province, the remaining municipalities and districts are
jointly accountable for the remaining 52 percent of the total capital budget.
Of particular concern are municipalities in Umgungundlovu, Umzinyathi and
Amajuba districts.

Capital spending in these districts range from 22 percent (Umzinyathi
district), 31 percent (Amajuba district) and 45 percent in respect of the
Umgungundlovu district. The persistent under spending on capital budgets
stifles the provision of basic services such as water and electricity for the
poor. As in previous years, the spending on operating budgets by almost every
single municipality is over 90 percent. It is still a concern if municipalities
are not spending 100% of their operating budgets given the fact that the
majority of these municipalities are reliant on the equitable share. The money
allocated and not spent could have addressed other national priorities.
Furthermore, employee Related Costs accounts for R5,3 billion or 32 percent of
the total municipal operating budget of R16,5 billion.

Top seven municipalities with employee costs 35% operating are shown in the
chart below. A valid point to consider is that the government has set tight
time frames within which to address backlogs to improve the social welfare of
our people. The consistent trend of under spending of capital budgets by our
municipalities during the last few years is clearly going to make it impossible
to achieve these objectives. It will also make it difficult for municipalities
to justify any increase in property rates with the implementation of the
Municipal Property Rates Act as the trend is evident that money collected
remains unspent.

Another important matter related to municipal budget is the adjustment of
the current year's municipal share of the nationally collected revenue after
the review of the equitable share formula. This has had some negative impact on
31 of our municipalities. This translates into a R267 million reductions in the
total municipal budget. Municipalities being a sphere of government are
entitled to their portion of the equitable share, however, it is important to
take into account that the constitution has made provision to allow
municipalities to collect own revenue to sustain their operations.

The promulgation of the Municipal Fiscal Powers and Functions Act, 2007 on 7
September 2007, further institutionalised the ability of municipalities to
raise their own revenue and become less reliant on grants. Our analysis
revealed that a number of municipalities including Vulamehlo, Umzumbe,
Okhahlamba, Imbabazane, Nongoma, Maphumulo and Ingwe local municipalities are
heavily reliant on grants to sustain their operating budget. Vulamehlo,
Umzumbe, Nongoma, Ezinqoleni, Nquthu, Msinga, Umzinyathi, eDumbe, uPhongolo,
Ulundi, Umkhanyakude, Ntambanana, Ndwedwe, Maphumulo, Ingwe and Umzimkhulu
local municipalities are 100% reliant on grants to finance their capital
projects.

Debtors

The Provincial Treasury is currently reviewing methods employed by
municipalities in the recovering of their outstanding debt. A cumulative amount
of R25 billion is owed to all the municipalities across the country.
KwaZulu-Natal municipalities account to R4,4 billion or just under 18 percent
of the total debt. Debtors outstanding for over 90 days constitute 73 percent
of the municipal total debtor's book. This is likely to increase during this
year and next year as a result of municipalities' implementation of the new
Property Rate Act.
While it is easy to address debt owed to municipalities by government
departments in terms of the provisions of the MFMA, it is difficult to deal
with debt owed by private consumers. Municipalities must still find ways to
address debt owed in terms of the old policies such as the R293 towns, communal
and trust lands on which the majority of the poor households are settled.
Chances are that a greater proportion of the debt from these communities will
become irrecoverable.

Although this is a national problem, our municipalities must take this into
account when compiling annual and adjustment budgets. The total debt owed to
municipalities in the province is currently approximately R4,4 billion and is
increasing year on year. Our municipalities need to take the collection of
overdue debt very seriously as this is one metric used to ascertain the
financial viability of municipalities.

A comparison was undertaken of 46 municipalities that reported at 30 June
2007. The African National Congress (ANC) controlled municipalities account for
83,8 % of the outstanding debt. The remaining 19 municipalities account for
16,2% of the debt. Chairperson viewed another way, approximately 50% of the
municipalities that we control account for more than 80% of the provincial
debt.

Local Economic Development

Municipality governments have a significant role to play in the development
of the local economy. The provincial government has released a Provincial
Spatial Economic Development Strategy (PSEDS) which is a follow up to the
Provincial Growth and Development Strategy. The PSEDS makes a significant
contribution in strengthening the integrated development planning (IDPs) of
municipalities. In the past there was no provincial point of reference in the
development of the local economies.

It is import to then check the extent to which municipalities have
internalised this strategy in their economic planning processes. It is
reasonable to expect that from this point on we should be planning for similar
sectors between province and municipalities. Also, the investment in economic
infrastructure is better facilitated if planning is co-ordinated. With a few
exceptions, at local and district municipality level there is a significant
lack of experience in planning and managing LED.

This is usually caused by inexperience and limited skills. Usually private
consultants are used to augment this shortfall with significant costs to
municipalities. Also LED is still not viewed as central in local development
strategies and IDPs. Where there are LED strategies and projects being
undertaken these are usually short term in nature, unsustainable and sometimes
lack in the objectives of poverty reduction and economic growth.

Through the grant system of Gijima KwaZulu-Natal as well as separate
attempts to develop an understanding of LED the Department of Economic
Development is assisting in the correction of this problem. It is hoped that
over time we would see an improvement in the LED strategies. The province now
has a single investment promotion agency namely Trade and Investment
KwaZulu-Natal. We have succeeded in consolidating the promotion agencies of
Uthungulu, Amajuba and Uthukela.

They were part of the now defunct KMMI. Going forward the single investment
promotion platform will market the province thereby optimising on its
potential. We need to always quantify the value of international visits what
did it bring to KwaZulu-Natal people. African writers have a term of people
called "been-to's:" I have been to New York, I have been to London, I have been
to Singapore.

Sometimes speakers, mayors, deputy mayors, municipal managers and the
executive at a district and local levels are abroad at the same time in large
cities and when they meet you often hear: "Hawu kanti nawe ula." The question
is what did the public buy with money you spent travelling.

Co-operative governance

The Provincial Treasury enjoys a good working relationship with all
stakeholders operating at the municipal level. Interaction through the MFMA
implementation technical working committee provides a useful platform for
sharing challenges encountered at the municipal level. This has already
assisted in reducing the problems of outstanding debt owed by government
departments.

A provincial debt steering committee has been established and the membership
of the committee comprise of representatives from the Provincial Treasury, the
Provincial Department of Local Government all provincial departments Chief
Financial Officers Traditional Affairs and representatives from selected
municipalities (eThekwini, Umgeni, Umhlathuse, Msunduzi and Umdoni). Although
there is some improvement in communication and working relationships at the
district level, there are still many challenges that need urgent attention.

Very few municipalities have yet to see the value of shared services in the
context of a cost effective budget. There are still local municipalities that
are performing functions that should be the responsibility of well functioning
district municipalities. These functions include the provision of bulk water
and electricity. With regard to the purification of functions, there remains a
problem of transition.

In the transition there are functions that historically are rendered by
municipalities when in fact they are provincial functions and vice versa. In
some instances there are some areas of overlap. To deal with this there must be
constant discussions between provincial departments as well as municipalities
affected. Also in instances where for political reasons working relations are
strained between municipality B and district, this has to be managed carefully.
Critical to this is that in cases where functions have to move, there must be
adequate capacity within the receiving entity and most importantly budgets must
be available to run those functions.

"Struggling" municipalities

A good measure of determining how municipalities are performing is to look
at their audit outcomes. For the financial 2005/06 16 municipalities got
disclaimed audit opinions, 23 were qualified, 16 unmodified which means there
was no change for the better as compared to the previous year, four were
adverse and two were not finalised. This picture does mean that we should all
be worried about the quality of financial management in the municipalities.

For the 2006/07 financial year on 18 October six municipalities had not
submitted their financial statements. Further to this the Provincial Treasury
has identified a number of struggling municipalities that require special
attention. The criteria used to identify these municipalities included the
following:

* Municipalities that were unable to spend more than 60 percent of their
grant funding
* Municipalities whose expenditure on employee related costs are in excess of
35 percent of their operating budgets
* Municipalities that could not adopt their draft and final budgets in
time
* The actual overall budget performance of the municipality during the 2006/07
financial year
* Late adoption of 2007/08 final budget (after May 2007)
* Assessment of 2006/07 budget performance based on In Year monthly Monitoring
report submissions
* Unsatisfactory spending against Financial Management Grant (FMG); the FMG is
meant to assist municipalities to build internal capacity and strengthen
financial management; the Municipal Systems Improvement Grant (MSIG) which is
intended for the improvements in business processes of municipalities and the
Municipal Infrastructure Grant (MIG)
* Timeous submission of 2005/06 annual financial statements
* Audit opinions for the 2005/06 financial statements
* Establishment of Audit Committees and Internal Audit Units struggling African
National Congress (ANC) municipalities that have been identified are:

* Vulamehlo
* Umzumbe
* Impendle
* Mkhambathini
* uMgungundlovu
* Mandeni
* Ingwe
* KwaSani
* Greater Kokstad
* Ubuhlebezwe
* Umzimkhulu
* Sisonke

Top seven municipalities with 60% grant reliance to fund the Operating
Budget are Vulamehlo, Umzumbe, Mkhambathini, Umkhalhamba, Imbabazane, Nongoma,
Maphumulo, Ingwe.

Municipalities that have approximately 100% Grant Reliance to fund their
Capital Budget are: Vulamehlo, Umzumbe, Ezinqolweni, Nquthu, Msinga,
Umzinyathi, aDumbe, uPhongolo, Nongoma, Ulundi, Umkhandyakude, Ntambanana,
Ndwedwe, Maphumulo, Ingwe, Umzinkhulu.

In keeping with our role in the Treasury we will from now begin to make
direct interventions in the area of financial management improvement in
municipalities. It is not enough for our supervisory role to wait for the bad
news to be delivered through audit opinions. Proactively Treasury will begin to
work closer with municipalities than has been the case to date.

Furthermore, when reviewing some of the reports that we get in terms of the
MFMA. These reports sometimes do indicate areas where we need to further
investigate. Our Internal Audit Unit will now sharpen its analysis of the
financial information we receive and will start conducting forensic audits in
cases where we believe that to be essential.

Conclusion

The report tabled today is an attempt at assessing the municipal budget
performance for the African National Congress led municipalities for the
2006/07 financial year. We have come to correct weakness not to condemn.
Difference between ANC run and Inkatha Freedom Party (IFP) run municipalities
must be visible. The profile of ANC municipal leaders must be beyond question.
The work we do today is review of performance of ANC we lead.

ANC set up structures - National Executive Committee (NEC), Provincial
Executive Committee (PEC), Regional Economic Communities (REC), Bid Evaluation
Committee (BEC) to fulfil the objective of the ANC "a better life for all". ANC
gave us talented members and supporters to mobilise for the fulfilment of the
organisation's objectives.

During the conference which will take place towards the end of the year, the
ANC leadership will have to account. We can't make excuses for lack of
performance. Leaders may have failed to identify tasks, create programmes or
failed to identify right people for the job. That will be our fault if we
couldn't correct. No excuses, we must account. As ANC we expect the role of
municipal leaders elected or appointed to ensure good governance; create a
climate for the promotion of economic growth to enable to fulfil the objectives
of:

* fighting poverty
* delivery of basic services resulting in a better all.

Thank you

Issued by: Department of Finance and Economic Development, KwaZulu-Natal
Provincial Government
18 October 2007